MONEY WEEK: government borrowing down to Rs 129 billion though surge in money supply continues

With a week left to run through the monetary accounts of FY07, Government borrowing goes down to Rs 129 billion on 23rd June compared with Rs 172 billion on 16th June, a decline of some Rs 43 billion in just one week. The story unfolds itself in the continuing build-up of foreign reserves, which jumped from slightly over $15 billion on 16th June to $15.182 billion on 23rd of it.
Major part of the total increase of $182 million over the week was accounted for by the central bank whose reserves increased by nearly $148 million being partly the effect of Government sales of dollars to the SBP with the rupee counter-part, received by it (the government), augmenting its funds position with the central bank. Hence the decline in net government borrowing from the banking system.
Notwithstanding the decline in government borrowing, private sector credit and net foreign assets of the banking system over the week increased by Rs 5 billion and Rs 28 billion respectively pushing up money supply. The net effect of this development was that contribution of private sector credit and foreign reserves to money supply during the year rose from 82 percent at the end of the previous week to well over 87 percent on June 23 with private sector contributing some 51 percent and foreign reserves some 36 percent.
This contribution would tilt further towards private sector and reserves by end June 2007 as reserves have already increased to $15.6 billion by 30th June. On the other hand, government sector and public sector enterprises together contributed about 23 percent and 2 percent respectively to fresh money supply during the year so far. The overall expansion effect of these four elements to incremental money supply was, however, moderated to the extent of about 12 percent representing comparable decline in the magnitude of OINs of the banking system.
Further details revealed that decline in government borrowing over the week was the result of lower borrowing both under budgetary head as well as commodity operations each declining by Rs 42 billion and Rs 1 billion respectively. Under budgetary borrowing, the decline occurred in the case of both the Federal government (down Rs 13 billion mainly on account of borrowing from scheduled banks) as well as provincial governments (down Rs 29 billion: Rs 19 billion on account of SBP and Rs 10 billion on account of scheduled banks).
Private sector credit increased by Rs 5 billion to Rs 291 billion during the week ended June 23. The entire increase was brought about by commercial banks mainly for businesses, including agriculture, industry, construction and personal loans (especially under consumer financing). A negligible increase occurred in credit extended by specialised banks to specified preferred sectors while commercial banks credit to PSEs declined by over Rs 2 billion over the week.
The entire retirement was made by the larger PSEs. The last two weeks trend, however, indicated that private sector credit may well end up close to or over Rs 300 billion compared with Rs 402 billion availed in the corresponding period of FY06.
Component-wise, 79.6 percent of overall monetary expansion of Rs 570.4 billion during FY07 to June 23 consisted of deposit money while the remaining 20.4 percent comprised of currency in circulation. During the corresponding period last year, these components had contributed 75 percent and 25 percent respectively of the incremental money supply of Rs 362.8 billion.
In the meanwhile, the size of reserve money during FY07 so far stood much higher at Rs 201 billion compared with Rs 114.5 billion in the comparable period of FY06 showing an increase of 20 percent over June 30, 2006 compared with last year's about 13 percent risking greater monetary proliferation in the coming year. (For comments and suggestions [email protected]).