Green shoots in money supply

Unlike its preceding weeks since the start of current fiscal year, the last week of August saw monetary aggregates finally rise. The 0.8 percent (Rs 51 billion) increase came on the back of sharp net foreign asset inflows to the tune of Rs 116 billion ($1.4 bn).
However, NFA's impact on money supply, net off the decline in domestic assets by Rs75 billion, squeezed to Rs41 billion in terms of increase in demand and time liabilities. Banking deposits also increased due to Rs 10 billion fall in currency-in-circulation - total demand and time liabilities for banks increased by Rs51 billion in the last week to clip the eight weeks decline at Rs 125 billion.
The rise in currency-in-circulation amid falling monetary aggregates and dearth in domestic liquidity was a main cause of concern since July. And chances are that those concerns will remain as this reversal could well be a one timer as few depositors who took money out of banks to avoid Zakat deduction in the start of Ramadan might have put the money back.
But, no abrupt deposits withdrawal was visible in the last couple of weeks ie before the start of Ramadan. This might apply that some of money which had routed to informal sector is back in the system - a good omen.
Given the weekly swings in NFAs, it is difficult to determine the trend and its impact on government borrowing and private investment. But for this week the hefty inflows could have just helped to put halt on the declining credit to private sector which averaged Rs 12 billion in first seven weeks.
NFA also helped increase private sector credit by Rs 1.5 billion in the last week of August arresting the decline at Rs81 billion for the July-August period. And if these foreign savings keep flowing, the crowding-in phenomena with much lower magnitude is likely, provided, of course, that pledges from the FoP forum and aids from other agencies materialise.
Although, NFA inflows failed to channel towards government borrowing in the last week of August, crowding-in is still advocated because foreign inflows help reduce the government reliance on domestic source.
But the big question is that why did money supply increased by only Rs51 billion, when government and non-government credit rose by Rs 14 billion, Rs 116 billion poured in by foreigners and Rs 10 billion through the decline in currency-in-circulation.
A safe estimate suggests, considering the decline of Rs89 billion was booked in other domestic items, there is a fair chance of foreign flows being channelled to government are routed through the reserves for some future debt repayment in order to keep the money supply in check amid banks' reluctance to offer fresh credit to private businesses and consumers.