None of the promises are yet fulfilled. Despite Finance Minister Shaukat Tarin's assurance that a part of war related reimbursements pending since nine months will be received in the first two weeks of February has gone bad yet again.
The bottom-line is that the recovery thesis is at the helm of foreign funds. Hence, a lacklustre performance amid tight liquidity is likely to continue, unless foreign money comes in the system one way or the other.
Net Foreign Assets NFA in the economy, after increasing by Rs101 billion between mid-December and first week of January, are back on their southward journey - falling by Rs85 billion since early January. More worrisome is the decline of Rs47 billion in the last week of January.
NFA's impact is visible on the overall picture of monetary aggregates. The government which desperately lacks resources was bound to come on domestic counters for its fiscal appetite. This is evident from the fact that the fiscal managers borrowed Rs54 billion from the central bank last week. This high powered money creation although helped in creating some bank deposits, had nothing to offer to private sector.
After the end of Eid festivities and cotton procurement season, the high powered money that was floating out of the system is now slowly coming back into the system. With Rs18 billion reverting to banking channels last week, the total toll for the last three weeks' decline in CIC amounts to Rs40 billion.
The money might not come back to system as swiftly for the remaining five months of this fiscal year, but history suggests that CIC might stagnate, considering that between February-June FY09, CIC moved eased by just Rs3 billion.
This seasonal impact does not undermine efforts required by the government to reduce the parallel economy. Without such efforts, higher tax to GDP ratio and higher saving rates are a distant dream.
Mind you, the recent demand of dollar in the open market is depicting that players in the parallel economy have enhanced appetite for foreign currency. This will not only threat the efforts of incentivizing tax evaders to turn their money white, but it will also hinder the process of improving the enforcement mechanism.
Nonetheless, last week, some high powered money creation and decline in CIC helped demand and time liabilities of banks to increase by Rs42 billion. This allowed money supply to improve by 0.5 percent (Rs25 bn).
High government borrowing from the State Bank and Rs7 billion rise in borrowings from commercial bank along with little retirement on commodity operations pushed the government's total borrowing toll higher by Rs 57 billion in week January 30. Public sector entities in the backdrop of looming circular debt borrowed Rs10 billion last week, leaving the private sector as a mere spectator.
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KEY MONETARY AGGREGATES
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Rs (mn) AS OF
30-Jan 23-Jan Change
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Currency in Circulation 146580 164403 -17823
Total Demand & Time Deposits 129423 86924 42499
Broad Money (M2) 277,676 252,959 24717
NFA 67273 114598 -47325
NDA 210404 138362 72042
Net Government Borrowing 203,183 146,138 57045
Borrowing for budgetary support 228704 167235 61469
from SBP 40489 -13914 54403
from scheduled banks 188215 181149 7066
Commodity operation -24054 -19776 -4278
Credit to non-govt sector 195,530 185,866 9664
to private sector 112469 113277 -808
to PSEs 83270 72834 10436
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Source: SBP
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