Money supply, which exceeded the whole year's target by a wide margin on May 12, decelerated by Rs 8 billion, to Rs 470 billion, though still above the target by Rs 10 billion.
The deceleration occurred entirely on account of a decline in net foreign assets (NFA) of the banking system, which indicated enhanced use of foreign reserves by the economic agents. On May 12, NFA of the banking system showed a build-up of Rs 88 billion. On May 19, NFA stood depleted by Rs 8 billion. This meant that economic agents has surrendered liquid funds amounting to Rs 8 billion to the SBP, or its agents, reducing thereby the incremental money supply by the same magnitude.
This decline in NFA was, however, not captured by the data on liquid foreign exchange reserves (due to lags and leads in data reporting) which indicated an increase of reserves from $12,782.8 million ($11,601 million being with SBP) to $12,792.6 million ($2,197.8 million being with scheduled banks) on May 19.
Component-wise change in money supply indicated that the decline occurred both in currency in circulation (down Rs 2.7 billion) and deposit money (down about Rs 5 billion, including time deposits--down Rs 7.8 billion--, demand deposits--up Rs 3 billion--and RFCDs--down Rs 0.5 billion).
Government borrowing during the week increased by Rs 10 billion and was entirely accounted for by commodity financing. An analysis of monetary profiling for last three weeks, as reported in BR of June 2, showed that, assuming other things constant, commodity financing contributed nearly 60 percent of the additional money supply pumped into the economy during last three weeks.
On April 28, incremental money supply during FY 07 amounted to Rs 412 billion. It rose to Rs 470 billion on May 19, showing an increase of Rs 58 billion during the last three weeks. On April 28, commodity financing of the Government showed a record Rs 50 billion of credit retirement to the banking system. This retirement shrank to Rs 16 billion only by May 19, showing an increase in commodity financing of Rs 34 billion during this period. This amounted to roughly 60 percent of the increase in money supply during the last three weeks, for which data were available.
At its present level, Credit Plan for the year would expect another Rs 26 billion of commodity financing without violating the year-end credit target for the purpose. If we go by weekly monetary expansion in account of commodity procurement operations of the Government during the last three weeks, we find an expansion of Rs 10 billion in the first week, Rs 14 billion in the second week and another Rs 10 billion in the third week. Even if we assume that for the remaining six weeks money supply on this count would accelerate by an average of Rs 10 billion per week, an additional Rs 60 billion of money supply is very much on the cards, especially because of expectations of an all-time high bumper crop and the chalking out of a comprehensive wheat procurement programs by the provincial Food Departments and Passco to ensure provision of support price of Rs 425 per 40 kg to the growers.
It may be of interest to recall that although much higher than the Credit Plan target of Rs 120 billion, budgetary borrowing of the Government (Rs 212 billion) has remained more or less unchanged for the last two weeks, though minor changes occurred in the holdings of government debt by the central bank (up Rs 2.4 billion) and the scheduled banks (down Rs 2.3 billion). However, Federal and provincial governments interchanged their positions with their budgetary indebtedness as it declined by Rs 5 billion in the case of the former and increased by as much numbers in the case of the latter.
Among other developments, private sector credit increased marginally, viz. by Rs 0.5 billion to Rs 263 billion over the week while credit availed by PSEs showed a larger increase of Rs 2 billion mainly by minor PSEs to Rs 11.7 billion. OINs of the banking system, however, depressed domestic credit by Rs 12 billion over the week. On balance, the increases and decreases in domestic credit under various heads almost counterbalanced each other. The entire decline in money supply, therefore, occurred on account of greater use of foreign assets of the system by the economic agents as stated in the opening paragraph. (For comments and suggestions research.dept@aaj.tv).