Monetary expansion has nearly reached the level it attained in early June in FY05. At Rs 396 billion, or 13.3 percent on June 10, 2006, monetary expansion closely followed the Rs 402 billion figure reached on June 11, 2005.
Looking at the weekly rate of increase in the last two weeks (viz Rs 12 billion per week), it appears that the actual monetary expansion at the end of the year might reach Rs 450 billion, depicting an increase of about 15 percent, compared with the target of Rs 380 billion, or 12.8 percent.
Last year, the increase in money supply during the last three weeks had roughly amounted to Rs 77 billion. A comforting factor, however, is that while last year the private sector credit was still increasing, this year it is either stationary at the existing level, as in the previous two weeks, or decelerating, as in the week under review.
The case with government sector is, however, different.
For many weeks since its borrowing first plummeted to its lowest to about Rs 10 billion in late March/ early April because of revenue effect generated by sovereign bonds/privatisation proceeds, it has generally been rising in big chunks and stood at Rs 132 billion on June 10, 2006.
A break-up of government borrowing showed that both budgetary borrowing and commodity operations increased by Rs 39 billion and Rs 4 billion, respectively, during the week ended on June 3 and by another Rs 16.5 billion and Rs 0.5 billion respectively during the week ended on June 10.
Break-up of budgetary borrowing during the week showed that the major borrowing occurred on account of provincial governments (up Rs 13 billion, entirely on account of SBP) while Federal Government's borrowing amounted to some Rs 3.5 billion, though entirely accounted for by scheduled banks (up Rs 4.9 billion) as borrowing from SBP squeezed by Rs 1.4 billion. Borrowing for commodity operations, which is mainly for on-going wheat procurement, increased by another Rs 0.5 billion to Rs 11.4 billion on June 10 implying that the off-take of credit for wheat procurement had since started decelerating. Originally, the government had thought that borrowing under commodity operation might reach Rs 20 billion by the end of the year.
Component-wise break-up of monetary expansion of Rs 395.5 billion showed that during the year, up to June 10, deposit money contributed Rs 290.9 billion of it while currency in circulation accounted for the remaining Rs 104.6 billion. Monetary expansion during the week ended on June 10 amounted to a little more than Rs 8 billion and was entirely represented by an increase in currency in circulation of about Rs 13 billion as deposit contracted by about Rs 5 billion.
The increase in currency in circulation was because of increase in government borrowing while decline in deposit money was because of deceleration in private sector credit.
Among other developments, the negative balance (liabilities being higher than assets) of other items (net) or OINs of the banking system stood reduced by over Rs 14 billion during the week, which brought about a net increase in domestic credit and hence monetary expansion between June 3 and 10. Net foreign assets (NFA) of the banking system, in the meanwhile, continued squeezing, as witnessed by the level of liquid foreign exchange as on June 10, and contributed to a net reduction in money supply of about Rs 11 billion during the week under review.
Depletion of reserves on the back of rising imports and maturing foreign liabilities continued during the week so that liquid foreign exchange reserves of the country stood lower at $12,969.7 million on June 10 losing the grip on the $13 billion mark for the first time since April 29. However, according to advance data on reserves, liquid foreign exchange reserves climbed again to $13,000.9 million as on 17th June.
The increase of over $31 million during the week was entirely on account of SBP whose reserves increased by $48.2 million while reserves held by scheduled banks shrank by $17 million.
(For comments and Suggestions: research.dept@aaj.tv)