For the first time this fiscal year, both NFA and NDA are in the greens in a single given week, but the festive driven growth in currency-in circulation reduced the flows in the banking system. Nonetheless, the increase in money supply for the third straight week during the week ending September 12 is a good omen for the economy.
Although, the money supply increased by Rs87 billion (1.7% wow) in the last three weeks, the Rs 35 billion rise in CIC has kept the banking liquidity in check, as only Rs 52 billion was poured in the demand and time liabilities. In two to four weeks time, most of the money gone out of system ie rise in circulation, will be routed back as business and shop owners deposit their money back into the system after Eid. This, with the multiplier effect (3.4 times on FY09 stocks of reserve money) can partially arrest the liquidity problem.
However, with the government's target to bring its borrowings from central bank to net zero for the first quarter will mount pressure on commercial banks to lend more money for the fiscal support, rather than the ailing private sector.
Hence, all hopes of private sector credit revival are on the shoulders of foreign inflows. It is pertinent to note that the exogenous factors which include bleak law and order situation, political chaos and reluctance of private sector to borrow are to a large extent out of the control of monetary flows.
So far, volatile foreign inflows have been, more or less, generating room for both the government and the private sector to borrow more. Net foreign assets of the banking system rose by Rs 29 billion in the second week of September, giving a big push to broad money supply which jumped by a whopping Rs 37 billion during the period.
But this could largely be attributed to the Eid effect, as people took out cash to pay for their festival related purchases. According to State Bank data, currency-in-circulation rose by Rs 18 billion during the week ending September 12, though sharply lower compared to an increase of Rs 27 billion in the preceding week.
Net government borrowing rose by Rs 17 billion, of which most was raised from commercial banks - a hefty Rs 14.9 billion. Despite, this shoving out behaviour by the government, private borrowers managed to take fresh loans worth Rs 13.4 billion during the period - halting the slide in private sector credit to Rs82.2 billion.
But should there be jubilation over this slight recovery in private credit? Perhaps, it will be soon to do so, as a significant part of this fresh borrowing may be, yet again, due to the Eid effect with businesses taking short-term debts to meet seasonal consumer demand.
==============================================================
KEY MONETARYAGGREGATES AS ON SEP12
==============================================================
Rs (mn)
==============================================================
12-Sep 5-Sep Change
==============================================================
Currency in Circulation 86,812 68,543 18,269
Total Demand & Time Deposits (124,286) (143,387) 19,101
Broad Money (M2) (37,214) (74,519) 37,305
NFA 125,918 96,830 29,088
NDA (163,131) (171,350) 8,219
Net Government Borrowing 159,634 142,314 17,320
Borrowing for budgetary support 163,964 146,070 17,894
from SBP 88,208 85,272 2,936
from scheduled banks 75,756 60,798 14,958
Commodity operation (3,615) (4,250) 635
Credit to lion-govt sector (88,433) (101,409) 12,976
to private sector (68,788) (82,198) 13,410
to PSEs (19,640) (19,207) (433)
==============================================================