Thanks to foreign inflows in the form of aid and loans and investment that pumped Rs 125 billion during first 86 days of first quarter, monetary assets which began the year in the red have turned green. . By virtue of this, the foreign exchange reserves are at 20-month high to stand at Rs 14.5 billion with exchange rate relatively stabilised in roughly the last three months.
On the flip side, persistent retirement of credit by private sector and adjustment in other items - mainly to keep government reserves for near term debt payments - have offset the domestic supply due to heavy borrowing from public sector for fiscal support both from SBP and commercial banks. This has kept the NDA growth in red - down Rs 73 billion.
The overall money supply increased by Rs 52 billion. This picture is in sharp contrast with that in the similar period last year when NDA was positive (Rs 150 bn) but sharp foreign outflows (Rs 189 bn) in panic like situation declined the money supply by Rs 39 billion.
In the last two weeks, the domestic assets are on the rise, but with not much to offer the ailing private sector, whereas, the NFA remains muted.
Half of the hefty, Rs 88 billion (1.7%), increase in M2 aggregates in the third and fourth weeks of September has gone out of the banking system - increasing currency-in-circulation by Rs 44 billion. However, a reversal in coming few weeks is likely, as the withdrawals for festive spending make their way back to system. Meanwhile, government borrowing from scheduled banks kept on its upward trend to Rs 121 billion with an increase of Rs 46 billion in the last two weeks. The retirement of Rs 29 billion from State Bank borrowing in addition to lack of other sources of funding has compelled the government to borrow abnormally from scheduled banks.
Nonetheless, as of September 26 data release, the government was still short of Rs 60 billion from its quarter-end target of net-zero borrowing from SBP. Surprisingly, public sector entities were the major borrower in the last two weeks with fresh loans of Rs 75 billion. This trend explains the tale of private sector borrowing: it isn't just crowding-out by the government who is eating the share of industry or that banks' prudence is hindering the credit, but it is the reluctance of industry itself, which is keeping them from borrowing.
The private sector retired Rs 26 billion in the third and fourth week of September resulting in the net decline of Rs 95 billion (3.3% of total credit) in the first quarter. In the same period last year, there was an inflow of Rs 69 billion to the private sector, despite the fact that country was at the verge of default.
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KEY MONETARY AGGREGATES AS OF SEP 26
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Rs (mn)
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26-Sep 12-Sep Change
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Currency in Circulation 131322 86812 44510
Total Demand & Time Deposits -79926 -124286 44360
Broad Money (M2) 51659 -37213 88872
NFA 124500 125918 -1418
NDA -72841 -163131 90290
Net Government Borrowing 177024 159634 17390
Borrowing for budgetary support 180955 163964 16991
from SBP 59624 88208 -28584
from scheduled banks 121331 75756 45575
Commodity operation -2648 -3615 967
Credit to non-govt sector -38697 -88433 49736
to private sector -94617 -68788 -25829
to PSEs 55925 -19640 75565
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Source: SBP
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