Monetary expansion during FY07 up to November 25 amounted to Rs 112 billion despite an increase of Rs 125.4 billion in private sector credit and a rise of Rs 59.3 billion in government borrowing. Continuing build-up of banking system's other liabilities and increased draw-down of its net foreign assets (NFA) provided the explanation.
Between July 1 and November 25, 2006, the negative change in Other Items (Net) (OINs) amounted to Rs 26 billion and the draw-down of NFA amounted to Rs 41 billion. Together, the two items added up to Rs 67 billion, neutralising thereby the expansion effect of government and private sector borrowings on money supply to a large extent.
The two factors had already neutralised nearly 44 percent of the expansion effect of domestic credit in the last about five months, Other details showed that increase in money supply during the year so far occurred mainly in 'currency in circulation', as deposit money increased only moderately. While 'currency in circulation' increased by nearly Rs 75.5 billion, deposit money increased by Rs 36.3 billion only. Within deposit money, demand deposits increased by Rs 1,125.4 billion while time deposits showed an equally big decline of Rs 1,086.8 billion.
Two other components, viz, other deposits with SBP and resident foreign currency deposits also declined by Rs 0.1 billion and Rs 2.3 billion, respectively, limiting the overall increase in deposit money so far in the year to just Rs 36.3 billion.
The exodus of time deposits from the banking system (mainly the commercial banks) appears to be the twin effect of low return paid by banks on money deposited with them and an increase in return rates paid on CDNS instruments--a non-bank borrowing window for the government.
It may be recalled that in the corresponding period of last year, money supply had increased by Rs 84 billion, or 2.8 percent, mainly because of a massive draw-down of NFA which amounted to nearly Rs 91 billion between July 1 and November 26, 2005, and a huge increase of Rs 69 billion in other liabilities of the banking system which helped reduce the impact of the increase of Rs 61 billion in government borrowing and of Rs 186 billion in private sector credit to a net domestic credit expansion of Rs 174.5 billion.
The increase in money supply of Rs 84 billion during FY06 was shared by 'currency in circulation', which accounted for Rs 77 billion of it, while deposit money accounted for the remaining Rs 7 billion, although, as against the current year, these were time deposits, which provided the main fillip to increase in deposit money last year.
According to available information, increase in government borrowings during the year so far has been concentrated entirely in government's budgetary borrowing as borrowing for procurement of commodities, and other credit expansion actually declined by Rs 3.3 billion and Rs 1.2 billion, respectively.
Break-up of government borrowing of Rs 63.7 billion for budgetary support revealed that Rs 34 billion was borrowed by the Federal Government while another Rs 30 billion was obtained by the provincial governments. These borrowings had amounted to Rs 73.9 billion and Rs 3.5 billion, respectively, in the corresponding period of last year when total such borrowings had amounted to Rs 77.4 billion. Hoswever, in both years, the borrowing was concentrated in the State Bank, not in the scheduled banks, indicating that institution-wise strategy of policy makers tended to be more inflationary.
Although expansion of private sector credit during the year so far has been slow it was nevertheless steady and reached Rs 125.4 billion by November 25 at which level it was nearly Rs 60 billion short of the level reached in the corresponding period of FY06.
As much as Rs 121.6 billion of it was extended by commercial banks compared with Rs 185.4 billion in the corresponding period of last year.
Specialised banks, however, appeared more active in meeting the credit requirements of specified priority sectors this year as they extended credit in the amount of some Rs 4 billion between July 1 and November 25, 2006 whereas they lent only Rs 0.4 billion between July 1 and November 26 last year.
Bank credit to PSEs showed larger retirement this year (minus Rs 6.2 billion) than in the previous year (minus Rs 1.6 billion) while SBP credit to NBFIs showed net additional lending of Rs 0.2 billion as compared to a net retirement of Rs 1.5 billion last year.
In line with continuing the draw-down of NFA which in rupees amounted to over Rs 41 billion on November25, the country's liquid foreign exchange reserves also continued declining and stood at $12,478.4 million ($10,239.7 million with SBP and $2,238.7 million with scheduled banks) as on that date.
As indicated in previous review, this trend would not only distort the true picture of monetary expansion but would also expose the rupee to increased market pressures. It has already crossed Rs 61 per dollar barrier on December 9, a day before the preparation of this review. (For comments and suggestions research.dept@aaj.tv).