The monetary policy statement narrates the simple dominance of government borrowing in money supply expansion during the ongoing fiscal year, leaving little recourse for the private sector. Budgetary support borrowing for July 1, 2010 to May 7, 2011 from banking system, including SBP, was at Rs 614 billion, showing year-on-year growth of 28 percent.
The more perturbing fact is that government borrowing from SBP contributed 80 percent share in expansion of reserve money, while total budgetary borrowing accounted for 95 percent of the expansion in M2, the MPS highlighted.
Nonetheless, SBP acknowledged the government for its commitment of retiring its liabilities from the central bank in Q3-FY11 as by the end of March the stock, on cash basis was reduced to Rs 1,155 billion, much lower than the promised September-end level of Rs 1,290 billion. But, to manage the devil of inter-corporate debt in the energy sector, the government freshly released Rs 120 billion for the affected companies.
According to State Bank Governor and Finance Minister, this injection to energy sector could result in a slippage of fiscal deficit by 0.7 percent of GDP from its revised target of 5.5 percent of GDP. While to keep the note printing in control, SBP has already shifted Rs 61 billion to the market through an open market operation and expects the government to converge to Sep-end level of borrowing. Mind you, as of May 7, the stock was at Rs 1,384 billion.
Year-on-year growth in both reserve money and M2 amounting over 15.5 percent is higher than SBP''s earlier projections and is causing difficulty in liquidity management, in turn, fuelling inflation for FY12. The other problem with note printing is that historically it increases CIC and substantial part of borrowing from SBP doesn''t come back into the system. The size of undocumented economy is increasing with note printing, which is not a good omen.
This curbs growth in banking deposits and tightens the liquidity in the system, pushing the interest rates further up. Hence, if the issue of high powered money generation is not arrested, market interest rates might push up irrespective of the central bank''s monetary stance. This could further imperil the private sector by crowding out the debt market.
In fact, the private sector is already facing the hardships on this account. Year-on-year growth in private sector credit which is predominantly for working capital need, stood about 3.2 percent on May 7, 2011 compared to 15.3 percent growth in deposits over the same period. The commercial banks in Pakistan appear to be doing very little, as over 80 percent of their incremental deposits are being served for fiscal and quasi-fiscal operations.
The need for an effective financial intermediary is dire in the country at a time when the investments to GDP ratio has plunged to abysmally low levels and appears to be continuing its nose-dive. It is high time the central bank took concrete measures to force the banks to resume their intended roles.
According to the MPS, national income accounts show that real private investment expenditure registered a decline of 3.1 percent while real private consumption growth was 7 percent, leading to a growth of 5.9 percent in total domestic demand.
Severe energy crises, deteriorating law and order situation are hampering the supply side, hence the widening output gap. This keeps the inflationary expectations high, and economy seems to be reaching a low growth and high inflation equilibrium. The worst scenario could be of stagflation!
MONEY AGGREGATES:
The currency in circulation increased by Rs 49 billion for the week ending May 7, 2011 to take the year to date flow to Rs 245 billion. While demand and time liabilities improved by Rs 31 billion, raising the overall money supply by Rs 80 billion last week, the year-to-date rise in this head stood at Rs 635 billion, or 11 percent.
There is not much to talk about the NFA as it improved by just Rs 13 billion, while NDA registered an increase of Rs 68 billion. Government borrowing from SBP increased by mere Rs 21 billion. The highlight of the week was the massive rise of Rs 121 billion in fiscal borrowing from commercial banks.
Meanwhile, the story of private credit is dismal as it fell by Rs 44 billion for the week ending May 7 to reduce year to date increase at Rs 44 billion.
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KEY MONETARY AGGREGATES AS ON MAY 7
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Rs (mn)
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7-May 30-Apr Change
Currency in Circulation 244,585 195,825 48,760
Total Demand & Time Deposits 387,618 356,131 31,487
Broad Money (M2) 635,884 555,651 80,233
NFA 165,717 153,156 12,561
NDA 470,166 402,495 67,671
Net Government Borrowing 491,251 342,218 149,033
Borrowing for budgetary support 614,106 472,234 141,872
from SBP 217,411 196,303 21,108
from scheduled bank s 396,695 275,931 120,764
Commodity operation (127,079) (134,236) 7,157
Credit to non-govt sector 120,290 183,612 (63,322)
to private sector 112,815 156,705 (43,890)
to PSEs 7,110 26,657 (19,547)
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Source: SBP
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