MONEY WEEK: fiscal year 2007 monetary expansion exceeds credit plan target by Rs 200 billion

Although as per policy documents the State Bank of Pakistan pursued a tight monetary policy throughout FY07, money supply during the year expanded by Rs 658.3 billion, or 19.3 percent, compared with the targeted growth of Rs 459.9 billion, or 13.5 percent. Thus, monetary expansion exceeded the credit plan target by about Rs 200 billion.
This was shown in the final data released by the State Bank on September 24, for the week ending the financial year 2006-07 (FY07). It may be recalled that in the beginning of FY07, annual report of the State Bank for FY06 had stated that to achieve the inflation target, money supply had been envisaged to grow at 13.5 percent, significantly lower than the realised money supply growth of 15.2 percent during FY06. So, how the State Bank would explain the failure on this front in the forthcoming annual report, is to be seen.
Maybe the unbridled expansion would be explained by a reference to the election year. This happens the world around, but the question is why we failed to provide for that at the beginning of the year.
What figures show is that government borrowing remained well within the target (viz Rs 92.4 billion against the targeted Rs 130.1 billion, with budgetary borrowing and borrowing for commodity operations behaving admirably well and within the respective targets) and so was non-government borrowing (viz Rs 385.7 billion against the targeted Rs 395 billion with private sector ending up at Rs 365.7 billion against the target of Rs 390 billion though PSEs borrowed Rs 19.7 billion exceeding the target of Rs 5 billion by a very wide margin).
The huge amount of excess borrowing by PSEs was not only in violation of the Credit Plan target, it also spoke of the continuing inefficiency of some larger PSEs. Hence, the proposition to privatise the PSEs. While the proposition is well founded, difference must be made between good PSEs and bad PSEs. What the Privatisation Commission should be doing is to go ahead privatising these lazy and hardly able to walk 'white elephants', instead of selling the 'running horses'.
Another significant factor which contributed to the much higher than targeted monetary expansion was the behaviour of foreign sector. The planners at the State Bank visualised an expansion of only Rs 9.8 billion on this account. It appears that the State Bank did not properly consult the Finance and Economic Affairs Divisions who normally have good estimates about the foreign sector behaviour, or maybe they did not convey the true estimates to the State Bank, which is an important ingredient in the formulation of the Credit Plan.
We cannot, however, absolve the State Bank of doing its duty in containing monetary expansion, and hence inflation, on the basis of the foregoing assumption. By mid-year, it was amply clear that foreign sector had started exerting pressure on money supply.
Why the State Bank failed to neutralise the massive contribution of Rs 260 billion, which was over and above the targeted annual growth of foreign sector? Perhaps, the State Bank could have neutralised the huge impact of foreign sector by absorbing liquidity through the sale of its own paper. But, why State Bank did not work on introducing its own paper despite the proposal lying pending since long? (For comments and suggestions [email protected])