A month ago, on March 17, the incremental money supply during FY07 stood at Rs 335.5 billion or 9.82 percent after having dropped from Rs 350.2 billion or 10.25 percent on March 10. It was hoped that growth in money supply would still continue though it may not reach or exceed the year-end target of Rs 460 billion.
A month afterwards, on April 14, it had expanded by 11.63 percent or Rs 397.2 billion, an increase of Rs 62.3 billion on the March 17 level. The entire expansion effect originated from government/private sectors on the credit side (whose borrowing/credit utilisation reached Rs 129.6 billion and Rs 266.4 billion respectively) and a net build-up of assets of Rs 72.7 billion on the NFA side.
The increase in money supply would have been higher but for the contraction effect of credit to PSEs (which showed a net retirement of Rs 2.3 billion) and changes on account of other items (net) or OINs (which showed higher liabilities than assets to the extent of some Rs 69.5 billion) which neutralised the expansion impact of above sectors to some extent.
Nearly, 30 percent of all incremental money supply consisted of increase in currency in circulation (up Rs 119 billion representing government borrowing from the SBP and rupee counterpart of increased home remittances) and another 70 percent by deposit money, including demand deposits (up Rs 1,313 billion representing private sector borrowing), time deposits (down Rs 1,037 billion reflecting depositors disenchantment about bank profits) and RFCDs (up Rs 1.7 billion).
At its present level, it appeared well nigh possible that by the end of the year not only that money supply would catch up the target, it may even exceed it except that the government receives some foreign exchange through privatisation, floating of Euro bonds or successful listing of GDRs of government-owned companies at foreign stock exchanges to cut to size its bank borrowings and simultaneously the resultant surge in foreign assets of the system is neutralised as economic agents surrender cash funds to buy additional foreign exchange to finance their increased trade bills.
Meanwhile, the government borrowing, which stood increased to Rs 73 billion during the year on March 17, shot up to Rs 129.6 billion on April 14, suggesting increased pressure on money supply originating from the government sector which understandably has inflationary implications.
Enhanced government borrowing was entirely on account of budgetary borrowing (up Rs 180.3 billion on April 14 as against the whole year target of Rs 120.1 billion) as borrowing for official commodity procurement especially wheat still stood at Rs 50.5 billion in the wake of the beginning of the harvest of an expected bumper crop of wheat in Punjab, Sindh, NWFP and Balochistan though harvest in NWFP and upper Punjab starts late.
The rise in budgetary borrowing, however, was entirely on account of the federal government whose net borrowing on April 14 stood at Rs 185.5 billion, while provincial governments borrowing showed a net retirement of credit to the extent of Rs 5.2 billion on the same date.
The private sector credit which during FY07, showed an expansion of Rs 246.6 billion up to March 17, rose further in the subsequent weeks and stood at Rs 266.4 billion on March 14, showing an increase of about Rs 20 billion during the last one month. At this speed, it is nearly an impossibility that the private sector credit would reach its whole year target of Rs 390 billion.
The growth in credit to the private sector which showed deceleration as year-on-year basis, it rose by 12.57 percent during July 1-April 14 (FY07) compared with the growth of 19.84 percent during the same period last year. The data on the sector-wise growth in the private sector credit are not available though available information for the period July-February FY07 showed that credit to the business sector grew by 13 percent compared with 14.8 percent in the corresponding period last year.
Within it, credit for working capital (including trade financing) grew by 15.8 percent compared with 15.4 percent in FY06 while credit for fixed investment grew by 6.7 percent compared with 13.7 percent in FY06. Also, credit to textile sub-sector grew by 8.1 percent compared with 17.2 percent in the corresponding period last year.
Within it, credit for working capital (including trade financing) rose by 15.7 percent compared with 23.7 percent in FY06 while credit for fixed investment decreased by 10.5 percent compared with a rise of 3.3 percent in FY06.
The credit to business (excluding textiles) increased by 15.1 percent compared with 13.8 percent in FY06 and, within it, the credit for working capital (including trade financing) rose by 15.8 percent compared with 12 percent in FY06, while the credit for fixed investment increased by 13.8 percent compared with a rise of 18.8 percent in FY06. It may be seen that the slowdown primarily stemmed from a deceleration in fixed investment loans (particularly in the textile sector) as the working capital requirements actually accelerated.
According to the latest SBP quarterly report, the deceleration in demand for fixed investment loans is mainly due to structural problems in the real sector of the economy that reduced its ability to absorb additional credit at the same pace as in the past two years. Excluding the textile sector, the growth in the rest of business sector advances seemed to have increased.
According to the latest SBP report data on sectoral distribution of credit revealed that during July-January FY07 major slowdown was witnessed in the commerce and trade sector, the growth of which was only one-thirds of the growth in the preceding year.
Further, the growth in personal sector advances during July-January FY07 was almost half the growth during July-January FY06. Within personal loans, all consumer financing products registered slowdown, with loans for consumer durables showing a net retirement which expected because of accelerated retirement of maturing past consumer loans.
In line with the position of NFA of the banking system, liquid foreign exchange reserves, which stood at $13,506.5 million on March 17 ($11,244.6 million with the SBP and $2,261.9 million with the scheduled banks) have been reported to have risen to $13,590.7 million on April 14 ($11,421 million with the SBP and $2,169.7 million with the scheduled banks). (For comments and suggestions research.dept@aaj.tv)