Budgetary borrowings from the central bank--State Bank of Pakistan--registered a quantum drop during the week ended on August 15, 2009. By the end of the previous week, the government had borrowed Rs103 billion to bridge its expenditure/revenue gap from the State Bank, which dropped to a mere Rs 26 billion.
In the absence of a 'Statement of Affairs' of the State Bank of Pakistan for August 8 and August 15, we can not say with surety what the position of government deposits is with the State Bank. But a major decline in government budgetary borrowing from the banking system can only happen if there is a big rise in government deposits with the central bank. It can be the result of foreign grants, ie foreign receipts of the government which do not entail a liability to pay back. Such receipts create rupee deposits of equivalent value when sold by the government to the central bank.
Government deposits with the State Bank also swell when sale proceeds of non-bank borrowing (mainly sales of NSS instruments to the public propelled at times by home remittances) are deposited with it. It appears that either one or the other or both have happened. The exact quantification of either source of financing is not possible as the State Bank did publish its fresh balance sheet--neither its website provided the latest information on savings mobilised the Central Directorate of National savings.
The reversal of the trend in net foreign assets (NFA) of the banking system from a continued contraction to one of expansion (see below) is, however, indicative that some foreign receipts were of the nature of grants besides loans. NFA posted an increase of some Rs 54 billion during the week resulting in an overall net increase of over Rs 14 billion during the year to 15th August from an overall drawdown of about Rs 40 billion up to 8th August 2009.
Inflows under 'Special Convertible Rupee Accounts' (SCRAs) also picked up momentum in August as up to August 28, of the total net inflow of over $64 million, as much as $59 million poured in during August alone. On the other hand, overseas Pakistanis remitted home a record $747.22 million in July 2009, surpassing the previous year's monthly average ($650.95 million) and those received in July 2008 ($627.21million) by 14 percent and 19.1 percent respectively. Hopefully, this trend held the sway in August as well, as the data for 15th August showed.
The rupee proceeds of home remittances normally end up in bank deposits (usually RFCDs), investments in NSS Schemes and in cash balances to finance current consumption at the receivers' end. With world economy in the grip of a severe recession and banks having been directly hurt by its intensity, there is possibility that wiser bank clients opted for diversifying the safe keeping of their liquid funds. So, rather than putting their cash funds merely with banks, in the form of rupee deposits or RFCDs, they opted to divert a part to the safest, yet liquid and remuneration-wise the most attractive avenue of investment, namely, 'the NSS instruments'. There is thus a strong possibility of non-bank borrowing having increased considerably during August thus effecting a corresponding reduction in budgetary borrowing from the State Bank.
Among other minor developments was a slight enhancement in credit retirement by the private sector which rose from Rs 67 billion to Rs 69.4 billion though its impact was moderated by an increase of Rs 1.7 billion in the credit offtake of PSEs whose borrowings improved from minus Rs 12.4 billion on 8th August to Rs 10.7 billion on 15th August.
The net result was that overall borrowing by the corporate sector remained more or less stalled around Rs 70 billion. According to one BR analyst (August 26), the halt of this massive decline 'is showing signs of crowding in, as the government, after meeting its current needs, might use foreign loans and aid inflows, which are likely in coming months, on development projects'. Next week's data may unfold the promise!
All these developments, read with increased other liabilities of the banking system, meant a decline of money supply to the tune of Rs 101 billion during the year so far on account entirely of deposit money as currency in circulation remained almost unchanged at previous week's level.
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