According to the latest consolidated balance sheet of the banking system, profiling monetary and credit situation in the country, expansion in overall banks credit in the first quarter of 2005-06 (FY06) reached Rs 61 billion, compared with the expansion of Rs 30.5 billion a week ago and actual contraction of Rs 1 billion in corresponding period of FY05.
However, not only this expansion in credit did not lead to an equivalent expansion in money supply, it also recorded, instead, a contraction of Rs 12 billion over the level attained on June 30, 2005.
The paradoxical decline in money supply was directly the result of a draw-down of foreign reserves or net foreign assets of the banking system amounting to over Rs 73 billion which more than offset the expansion impact on money supply caused by increase in the domestic credit. This was so because economic agents surrender rupees to the central bank as they purchase foreign exchange from it. In the process, both assets and liabilities of the central bank decline, leading to contraction in money supply.
A break-up of the overall credit expansion showed that both private and government sectors contributed to the phenomenon besides the sundry or other items whereas utilisation of credit by PSEs and other financial institutions (OFIs) showed a contraction when compared with the respective levels obtained on June 30, 2005.
Private sector credit rose by Rs 34.4 billion mainly on account of commercial banks (up Rs 34.7 billion); government sector credit surged by Rs 22.2 billion mainly on account of budgetary borrowings [up Rs 22 billion mainly on account of Federal Govt (up Rs 24 billion)]; other items (net) increased by Rs 6.3 billion; while credit utilisation by PSEs and OFIs declined by Rs 1.8 billion.
Component-wise analysis of contraction in money supply revealed that the entire contraction occurred on account of decline in all the three elements of deposit money including demand deposits (down Rs 22.5 billion), time deposits (down Rs 3 billion) and resident foreign currency deposits or RFCDs (down Rs 1.7 billion). Their total contraction impact was largely offset by an increase in currency in circulation in the amount of some Rs 15 billion.
As borne out by the changes in the net foreign assets of the banking system, liquid foreign exchange reserves of the country continued declining through this week to stand at just $2 million above the $12 billion mark. These have already slipped to $11.9 billion and to $11.7 billion in the following two weeks ended October 15, 2005.
Hopefully, the reserves may bounce back to the $12 billion mark in the coming weeks as more earthquake assistance is swapped with the State Bank, and the country starts receiving enhanced expatriate remittances to finance their quake-hit relatives (cf BR October 22, 2005). The only good thing in the massive draw-down of liquid reserves of some $1 billion since April 30, 2005 was the monetary contraction of about Rs 60 billion during the period which must have dampened, somewhat, the rate of inflation in the country.
In the FE market, the rupee firmed up versus dollar in both interbank and open markets during the week ended October 1, 2005 amid eased supply of the US currency supported by increased inflow of expatriate remittances pouring in to finance Ramazan and Eid expenditure by relatives in Pakistan.
In the interbank market, the dollar was exchanged at Rs 59.69 and Rs 59.70 at the close of the week for buying and selling, respectively. On the other hand, the rupee was traded at Rs 60.40 per dollar for buying and at Rs 60.45 per dollar for selling on Saturday in the open market. The Euro, in the meanwhile, fetched Rs 72.50 at the buying counter and cost Rs 72.60 at the selling counter on September 30, 2005.
(Comments and Suggestions: research.dept@aaj.tv)