There wasn't much excitement in last week's monetary aggregate numbers. The retirement of budgetary borrowing overshadowed the private sector credit off take as net domestic assets fell by Rs 13 billion. And with a meager increase of Rs 4 billion in net foreign assets, the demand and time liabilities remained under pressure, down Rs 3 billion.
The demonetization of central bank borrowing and post-Eid effect reduced the currency-in-circulation by Rs 7 billion, with the overall money supply easing by Rs 9 billion. But keeping last week's movement aside, there seems to be some light at the end of tunnel with private sector off take showing gradual signs of recovery.
The inflows of Rs 45 billion from World Bank, payments of advance tax to the tune of Rs 35 billion, dividends from public sector entities and some other receipts during the course of first three weeks of the ongoing quarter have given the economy a much needed breather.
Not only the government was able to demonetise its central bank debt to meet IMF's target but the pressure on commercial bank borrowing was also released, with the government cumulatively retiring Rs 132 billion in the quarter to date. This triggered some crowding-in phenomenon much to the respite of non-government sectors.
The last week of previous quarter saw a hefty Rs 76 billion routed to public sector entities mainly aimed to plug the inter-corporate circular debt. With the issue of second round of TFCs worth Rs 90 billion by a consortium of commercial banks that eased the liquidity position of PSEs, credit have more chances to flow towards the ailing private sector.
Private sector flows increased by Rs 34 billion in the last three weeks, with Rs 21 billion lent in the last week alone - its highest weekly flow since the start of this fiscal year.
With the US economy posting its first quarterly growth in two years last week, one can expect an increase in export orders, especially for the textile sector, for the upcoming winter season.
This should push the private sector to pursue fresh credit as commercial banks will now have higher liquidity and also the confidence to lend, considering that banks are already sitting on surplus liquidity of over Rs 5 billion.
With SBP's projections of monetary growth of 12 to 13 percent for the ongoing fiscal year the case for private sector revival is imminent. Considering that M2 is virtually at the beginning-of-year levels at present, SBP targets imply an average monthly increase of money supply by Rs 75 billion in the remaining eight months.
Moreover, the inclination of west towards Pakistan owing to all out attack against war on terror may bring fresh liquidity in the system either through the government channels or through NGOs. These inflows include the first tranche of Kerry Lugar, the amount pledged by Japan in FoDP moot and other bilateral aid and soft loans for infrastructure development.
The growing trends amid the relaxation in provisioning requirement for commercial banks for doubtful and substandard loans will allow excess liquidity with its multiplier magic to stimulate the engine of growth.
Of course, however, bleak security situation remains a big risk to this thesis of short to medium term revival of credit.
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KEY MONETARY AGGREGATES AS ON OCT 17
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Rs (mn)
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17-Oct 10-Oct Change
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Currency in Circulation 105,178 111,700 (6,522)
Total Demand & Time Deposits (109,262) (106,478) (2,784)
Broad Money (M2) (3,829) 5,482 (9,311)
NFA 120,908 117,266 3,642
NDA (124,740) (111,785) (12,955)
Net Government Borrowing 44,792 76,357 (31,565)
Borrowing for budgetary support 46,647 77,831 (31,184)
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from SBP (57,513) (36,438) (21,075)
from scheduled banks 104,160 114,269 (10,109)
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Commodity operation (238) 83 (321)
Credit to non-govt sector 12,206 (13,934) 26,140
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to private sector (60,376) (81,181) 20,805
to PSEs 73,413 68,093 5,320
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