Fifty billion rupees. That's the amount withdrawn from the system in the week just before Eid, marking the coincidental peaking of both the cattle market and the cotton farmers' cash economy, which jacked up the currency-in-circulation to a total of Rs 111 billion throughout November. This column anticipated an increase of Rs 70-100 billion due to Eid related cattle shopping.
It wasn't, however, that happy an Eid for the industrialists as this hefty withdrawal at the time of deserting foreign flows that created an acute liquidity shortage. Thankfully, in this case, what goes around comes around - money to the tune of Rs 30-40 billion is expected to be back in the system in a week's time, a trend that is typical of Eid related cash cycle.
Currently almost all the fresh money injected into the system is either being routed to fiscal financing or to the working capital needs of corporations - keeping fresh investment projects largely muted. But there might be some liquidity in the offing for the non-government sector even if the FoDP and U.S coalition commitments materialise partially. While, liquidity crunch is not the only factor hindering fresh investments; liquidity management can indeed stimulate some growth in the ailing industrial sector and boost consumer spending.
The liquidity crunch is also reflected by the rise in 10-year bond yield by 23 bps since the last policy rate revision. This, coupled with 17 bps decline in the one-year paper - relative steep yield curve - also implies short-term stability with some uncertainty in the long run, which however, is a bit too early to assert.
A more plausible reason is that liquidity shortage is tilting investors to short term papers and creating high demand for T-Bills. Nonetheless, SBP is intervening at regular intervals to address the issue, clearly evident in its latest reverse open market operations where it injected Rs 119 billion in the system at 11.85 percent.
Apart from the steep increase in CIC, monetary aggregates in November's last week are not much different from the week before. However, with the ever increasing appetite of government resulting in higher borrowing for fiscal support, the fiscal managers knocked the familiar doors of the central bank, while retiring some liabilities to the commercial banks. The flight of Rs 9 billion worth of foreign money during the week mirrored its 'confidence' in Pakistan - taking the quarter to date outflow to Rs 61 billion.
Part of this shortage was plugged by sharp increase of Rs 26 billion in NSS inflows in October and the raising of Rs 2.5 billion through NIT government bond market fund. Yet the government had to borrow Rs 40 billion from the central bank during the week, taking the toll to Rs 129 billion in the last two months versus a net retirement of Rs 74 billion in the first quarter. Nonetheless, to the like of last quarter, government may partially own what's actually SBP's profit of about Rs 50-70 billion, to meet its net zero quarterly SBP borrowing target.
With a net retirement of Rs 11 billion worth of loans from commercial banks and virtually no activity in commodity operations, total fiscal borrowing by the government stood at Rs 30 billion for the fourth week of November.
In the meanwhile, the private sector continued its slow credit building primarily for working capital requirement of textile related business for cotton procurement. However, what is been widely termed as economic recovery might only be a false alarm as Rs 19 billion borrowing in the last week, which takes the two months credit to Rs 127 billion, mainly reflects the seasonal hike of last quarter of calendar year - especially when seen in the light of struggling LSM sector.
Despite the relatively bigger quantum of high powered money creation (Rs 40bn) and credit building by corporate sector (Rs 24bn, including Rs 5bn borrowed by circular hit PSEs), the deposits creation reduced to Rs 11 billion owing to the hefty sum going out of the system - with total monetary aggregates rising by Rs 57 billion (1.11 %) in the last week of November.
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KEY MONETARY AGGREGATES
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Rs (mn) AS OF
28-Nov 21-Nov Change
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Currency in Circulation 201,915 152,211 49,704
Total Demand & Time Deposits (19,828) (30,925) 11,097
Broad Money (M2) 182,493 125,364 57,129
NFA 71,173 80,001 (8,828)
NDA 111,320 45,363 65,957
Net Government Borrowing 206,505 176,794 29,711
Borrowing for budgetary support 208,625 179,773 28,852
from SBP 55,798 15,663 40,135
from scheduled banks 152,827 164,110 (11,283)
Commodity operation (488) (1,295) 807
Credit to non-govt sector 107,578 83,533 24,045
to private sector 32,021 13,278 18,743
to PSEs 76,371 71,059 5,312
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Source: SBP
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