Foreign outflows crowd out private investment

While latest weekly monetary supply numbers show trends similar to the week before, with money supply falling by Rs23 billion in third week of August comparable to a decline of Rs25 billion in the week before, domestic and foreign flows have taken a U-turn.
This compels us to revisit our view of crowding-in phenomenon, based on hefty foreign inflows seen in the second week of August and discussed in the same columns last week. The foreign flows account is back in the red with a net outflow of Rs28 billion during the week (inflow of Rs54 bn last week) to equal an outflow of Rs15 billion in seven weeks of this fiscal year. There seems to be a case of onetime inflow of some aid for the government in the previous week, which might have increased government deposits with the State Bank and had given room to retire state liabilities to the central bank.
But with reversal in foreign flows, the government remained a net borrower from the SBP in this week; the toll has increased by Rs10 billion (retirement of Rs70 bn previous week) taking government's reliance on central bank to Rs42 billion for this fiscal year to date. However, this is far lower than the over hundred billion debt from SBP in the first five weeks of FY10.
Nonetheless, unlike previous weeks the government reduced its borrowing from scheduled banks by Rs6 billion in the seventh week, versus average borrowing of Rs12 billion in the preceding weeks. This might have given them some lending room for private business and consumers, but, it was more than offset by dismal situation of foreign flows. On a net basis, the government borrowed Rs9 billion this week to increase its borrowing toll to Rs93 billion during the fiscal year to date.
So, continuing the trends seen since July, the private sector has taken the brunt of all the government's inabilities to match its expenditures with resources. The private credit declined by Rs13 billion this week, at the mercy of foreign flows, versus a fall of Rs2 billion last week -- taking the total outflow in that account to Rs82 billion in just first seven weeks of FY10.