The central bank on Thursday said the pace of broad money (M2) growth during the first seven and half months of the fiscal 2005-06 slowed down touching 8.03 percent (Rs 238.26 billion) from 10.37 percent (Rs 257.83 billion) in the corresponding period last year.
The data released by State Bank of Pakistan (SBP) reveals that the decline was dominated by a reduction in Net Foreign Assets (NFA) of the banking system, reflecting the increasing pressure on the country's external accounts, as Net Domestic Assets (NDA) growth was relatively strong due to increase in government borrowing for budgetary support and strong growth in private sector credit.
It is worth mentioning that the government has planned to keep M2 growth within the limits of Rs 380 billion for 2005-06 with growth of 12.81 percent.
The decline in M2 growth reveals that the bank's tight monetary policy had vigorously helped in containing the growth in broad money to ensure that inflation remains within the projected limits of 7.7 to 8.3 percent.
Private sector credit growth combined with strong government borrowings led to a sharp expansion in the NDA of the banking system by 14.27 percent (Rs 332.35 billion) in the first seven and half months of the fiscal 2005-06, which was Rs 218.91 billion with growth of 11.5 percent.
The surge in credit growth has been counterbalanced by the decline in the NFA, which limited M2 growth to a moderate 8.03 percent during the period.
The NFA position has been impacted by exceptional growth in the trade deficit that reached $6.496 billion during July-January 2005-06, showing an increase of 127.31 percent over the corresponding period last year.
The data states that M2, which comprises currency in circulation, demand deposits, time deposits, resident foreign currency deposits (RFCDs), and other deposits with SBP up to February 18, 2006 stood at Rs 238.26 billion against Rs 257.83 billion in the corresponding period last year.
It further reveals that besides time deposits, all other M2 ingredients declined during the period under review.
This 2.34 percentage point reduction in M2 growth since July 2005 indicates that the central bank moved to contain the inflation successfully through its tightened monetary policy instrument.
In its annual report 2004-05, the SBP had projected consumer inflation (consumer price index) to rise between 7.7 and 8.3 percent in 2005-06 ending in June. The original inflation target was 8 percent.
To arrest inflation within this range, the bank is keeping M2 growth in check, whose fast-paced surge may add more fuel to inflation. In seven months to January 2006, the CPI inflation rose to 8.48 percent-a level seen by some experts as alarming.
The way the central bank is trying to contain monetary growth would help in curtailing CPI inflation. The experts believe that the M2 growth could be controlled if the NDA of the banking system falls sharply.
However, on the other hand the bank's data shows that the NDA flow during this period rose to Rs 332.35 billion in the third week of February from Rs 218.91 billion during the corresponding period last year while, the government's target is Rs 365 billion for the fiscal 2005-06.
The major causative factor for NDA growth during the period was the continued growth in credit to private sector. Its impact was further supported by the larger than expected rise in the government borrowing from scheduled banks which during the period under review stood at 144.67 billion-surpassing this fiscal limit (Rs 98 billion) by 47.62 percent.
It means that if the authorities want to further arrest the M2 expansion and government borrowing, they should keep control on the NDA growth.
According to the data, the banking system NDA rose by Rs 113.44 billion in seven and half months ending on February 18, 2006 as the government increased its bank borrowing for budgetary support by Rs 46.67 billion.