With the commodity financing beginning to swing amid cotton procurement and sugar crushing season, the banking sector saw fresh deposits to the tune of Rs 65 billion in the last week of October 2009. The new deposits in the backdrop of fresh government borrowing of Rs 28 billion from the central bank during week pushed money supply by 1.2 percent in the week ending on October 31.
The Rs 61 billion increase in M2 takes the toll to Rs 53 billion for the first four of current fiscal year. It appeared that post-Eid hangover was about to end, as currency-in-circulation (CIC) fell by a mere Rs 4 billion during the week compared with the decline of Rs 36 billion in the last four weeks. As the government retired Rs 134 billion of its amount owed to SBP in the last four weeks, the fall in CIC was fully offset by the demonetisation despite Rs 68 billion worth of fresh lending to the corporate sector,
With fresh fiscal borrowing from the State Bank amid continuation in the private sector credit offtake the multiplier effect was visible on the creation of deposits; albeit the creation of new deposits generated by fresh loans would likely fall owing to statuary reserve requirements to improve the advance-to-deposit ratio of commercial lenders.
As was the case in previous four weeks, foreign flows remained muted during the week, taking the net outflow to Rs 11 billion in last five weeks. Net domestic assets, however, increased by Rs 61 billion in the last week of October.
In the corporate segment, the private sector credit continued its smooth sailing to rise by Rs 18 billion, primarily owing to commodity financing and export-oriented borrowing. However, with the retirement of Rs 2 billion by public sector entities, total corporate and consumer lending was restricted to Rs 16 billion.
The question at this point is what will trigger the monetary growth in the coming months. The power money creation will be arrested in the next few weeks and may reverse subsequently to ensure that the quarterly net-zero fiscal borrowing from central bank target is met. If this means the government would rely on other domestic sources to meet its expenditure and revenues gap, then the private sector ought to take the bitter pill of crowding out.
But, as per the statement of Shaukat Tarin, foreign inflows to the tune of $2 billion in the form of aid and soft loans are expected in this quarter. They may include $500 million from US coalition support front and rest from FoDP pledges including the commitments made by Japan, US, and Saudi Arabia.
With most of these funds likely routed to federal government to plug its fiscal gap, it will have a dual effect: first, the government might retire some of its central bank debt, which will partially offset the increase in Net Foreign Assets through a decline in NDA. Second, it will reduce fiscal managers'' reliance on commercial banks, giving more room to private borrowers.
So the money creation of these foreign inflows will not be that significant and, ironically, it might not mitigate the inflationary pressures that typically emanates from high-powered money creation. Although the inflow foreign money will strengthen the balance of payment situation in short to medium term, the financing of these repayments will be a big question in the years to come. In fact, it will put a pressure of returning this money with interest payments to foreign lenders.
As for the short term, lesser government reliance on commercial banks amid improved confidence of private borrowers will increase the flow of credit to the much needed corporate sector, which in turn might lead to at least some growth in industrial units.
Meanwhile, the likely inflow of foreign aid and soft loans are not expected to create excess liquidity in the system to the extent to that it drives the interbank borrowing rates significantly lower. However, if the current global economic recovery turns out to be an echo bubble, as it is being termed by some, then the fading of export orders will lead to corresponding decline in confidence of the private sector to take fresh loans-something that can create excess liquidity and drive KIBOR downhill. But if it is really an echo bubble waiting for its big burst then the whole notion of foreign flows is also questionable. And that is scary indeed.-(Feedback at ali.khizar@br-mail.com)
===============================================================
KEY MONETARY AGGREGATES
===============================================================
Rs (mn) AS OF
---------------------------------------------------------------
31-Oct 24-Oct Change
---------------------------------------------------------------
Currency in Circulation 91,291 95,604 (4,313)
Total Demand & Time Deposits (38,270) (103,451) 65,181
Broad Money (M2) 53,415 (7,582) 60,997
NFA 113,648 113,668 (20)
NDA (60,232) (121,249) 61,017
Net Government Borrowing 75,866 50,438 25,428
Borrowing for budgetary support 75,866 46,454 29,412
from SBP (43,606) (72,183) 28,577
from scheduled banks 119,472 118,637 835
Commodity operation 5,807 5,612 195
Credit to non-govt sector 44,576 28,836 15,740
to private sector (23,348) (41,015) 17,667
to PSEs 68,727 70,654 (1,927)
---------------------------------------------------------------
Source: SBP
===============================================================