MONEY WEEK: nothing to rejoice on Washington moots

At a time when economic losses are estimated in no less than billions of dollars, a little less than half a billion dollar emergency assistance by the country's prime lender will do no wonder to the relief and reconstruction efforts. The IMF has kept in view the pre-flood slippages and has not shown much mercy as regarding the impact of the unprecedented floods.
Poor public finance management is to blame; as the government breached the IMF-specified targets of fiscal deficit, reduction in subsidies, implementation of reformed the GST and borrowing from the central bank.
These pre-flood issues further delayed the fifth review and the release of $1.7 billion, a part of the Standby Arrangement with the IMF. And hopes of renegotiations of existing loans and or a new package at softer terms are quickly fading away. The same is the fate of the case of the foreign debt write-off by other multilateral agencies. Pakistan's economic team could not strike a good deal with other multilateral agencies - the World Bank and Asian Development Bank - as well. The WB increased its pledges for floods relief by $100 million to reach the billion dollar mark, whereas the ADB pledged $2 billion.
But unlike the IMF's emergency assistance of $450 million, the rest of the pledges are a mere re-allocation of funds already planned to be disbursed to Pakistan in the coming five years or so. The ease of release i.e. without much conventional hurdles and early disbursement is the only advantage.
Out of the billion dollars the WB pledged, $100 million is going to be released in a few weeks time while the rest will be disbursed in a year or two in a phased manner. Hence, in this month the IMF ($450 mn) and the WB ($100 m) will only be available for fiscal support in the short-run.
Even counting the WB and ADB pledges and the UN and other pledges, the quantum of money promised is far less than what is required. Different economists' estimates vary on the loss of capital assets as well as on the GDP loss.
Surprisingly, the biggest number was quoted by the prime minister in his briefing to the cabinet. He feared that quantum of losses could reach as high as $43 billion which seems to be a highly inflated projection. Reportedly, the estimates have not been done by the Ministry of Finance, rather they are sbeing computed by the economic wing of the Foreign Office.
Nonetheless, comparing this number with the GDP as done by different corners of media and analysts, is not the right approach. The PM talked about the capital assets while the GDP is a measure of output i.e. yields on capital assets. Empirically, the capital-to-output ratio ranges between 3x-4x; even by taking it on the higher side, the implied loss to the GDP comes to around $10-11 billion. However, Dr Hafiz Pasha of the Institute of Public Policy estimates the losses to the GDP in the vicinity of $7 billion.
Although a more precise number can only come on the surface after the joint Disaster and Needs Assessment by the WB and ADB is completed, the amount pledged from donors and lenders from the international community is peanuts nonetheless. To add to the ado, domestic sources are scarce and going to eat further the pie of the private sector.
More worrisome are the rampant corruption levels and inefficiencies in government and quasi-government operations. The speedy disbursement of $3.5 billion from the IMF, WB and ADB adds woes to the looming debt trap.
MONEY AGGREGATES:
The week ending August 20 happened to be a dull week, looking at the picture of monetary aggregates. With virtually no change in the currency in circulation and a slight decline in the demand and time liabilities, broad money fell by just 0.07 percent to Rs 4 billion.
Overall money supply went down by 2.04 percent to Rs118 billion in the first fifty days of this fiscal year. Considering the seasonal lull for credit uptick, the fall is in line with the similar period last year and this number might pick up in the second quarter. However, the quantum of rise might be lower owing to the floods.
On the assets side, last week did not witness much excitement. Net foreign assets continued its slow downward journey with a fall of Rs8 billion year-to-date decline reached Rs61 billion. The government retired Rs8 billion to scheduled banks with no change in SBP borrowing and quasi-fiscal operations. Net government borrowing for budgetary support remained the same as the preceding week.
The private sector credit for a change was up by Rs5 billion last week to reduce the year to date fall to Rs60 billion.

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Currency in Circulation

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                                           Rs (mn)

                                  20-Aug    13-Aug    Change

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Currency in Circulation           79,261    79,512     (251)

Total Demand & Time Deposits    (197,321) (193,527)  (3,794)

Broad Money (M2)                (118,046) (113,983)  (4,063)

NFA                              (60,803)  (52,544)  (8,259)

NDA                              (57,244)  (61,437)    4,193

Net Government Borrowing          94,199   103,542   (9,343)

Borrowing for budgetary support   93,746   102,064   (8,318)

from SBP                         134,034   134,364     (330)

from scheduled banks             (40,288)  (32,300)  (7,988)

Commodity operation                 (287)      784   (1,071)

Credit to non-govt sector        (60,076)  (65,181)    5,105

to private sector                (59,616)  (64,804)    5,188

to PSEs                             (701)     (432)    (269)

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Source: SBP

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