Just as the money withdrawn on account of Eidul Fitr was about to revert back to the system, signs of even bigger chunk of money leaving the system have become visible. The huge outflow from the system in the first week of November can be attributed mainly to cattle buying for the Eidul Adha due later this month and partly for cotton procurement.
This arrested the growth in new deposit despite some high powered money creation owing to government borrowing from the central bank and kept a check on credit to corporations and other private borrowers.
A downward adjustment of Rs 22 billion in other items, reduced the total increase in net domestic assets to Rs 36 billion for the first week of November. This coupled with a fall of Rs 6 billion in NFA, increased the total money supply by Rs 30 billion (0.57%), despite the fall of Rs 17 billion in time and demand liabilities.
After a decline of Rs 40 billion in the last five weeks, the currency-in-circulation jumped by Rs 47 billion in the week ending November 7 as households made a flurry of payments for sacrificial animals across the country while millers made payments to cotton farmers.
A withdrawal of further Rs 40 - 70 billion in the remaining three weeks of November is on cards, assuming that total size of the cattle market will likely hover between Rs 70-100 billion based on the supposition that 20 to 30 percent of households (with seven persons) will spend Rs 15,000 each on buying cattle this year.
As NFA remained muted for yet another week owing to delay in fiscal support payments from abroad, the government continued its reliance on borrowings from the banking system. After retiring Rs 133 billion owed to the central bank in the last week of previous quarter to meet IMF''s target, fiscal managers have borrowed Rs 73 billion from SBP since the start of this quarter - with Rs 43 billion taken in just the first week of November. In total, government borrowing for budgetary support amounted to Rs 59 billion during the week, including Rs 16 billion borrowed from commercial banks.
The credit to private sector that took off since the start of this quarter - up Rs 71 billion last month remained sidelined during the week as most of the high powered money created was routed out of the system. With Rs 5 billion retirements by private sector along with Rs 4 billion raised by public sector entities, credit to corporate sector virtually remained stagnant.
One might see similar trend of government borrowing from central bank as well as commercial banks during the rest of November since there hasn''t been any inflow of the promised soft loans and aid from the US and the FoDP pledges to date.
And with money likely to continue flowing out of the system for cattle shopping as well as cotton payments, deposit creation will remain subdued and government reliance on commercial banks may crowd out some private credit - keeping the multiplier effect inactive for a while.
Although, the base rate cut widely expected later this month will not be much to provide relief to corporate sector, private credit offtake might get a boost during December, if $2 billion from the US and other FoDP pledges are routed to Pakistan in this quarter amid the return of money to the system after the termination of seasonal cattle market.
The decline of 30-bps in the cut-off yield of 12-month T-Bill ahead of the monetary policy review and IMF''s concerns over inflation, which bottomed out last month, on the fear of rising international commodity prices, a larger cut would have to be followed by upward revision in subsequent reviews. Hence, despite that real interest rates are positive, the market is expecting a rate cut in the vicinity of 50-100 bps in this week''s review, where the tilt is more towards 50 bps with no further revision expected this fiscal year.
(Feedback at ali.khizar@br-mail.com)
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KEY MONETARY AGGREGATES
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Rs (mn) AS OF
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7-Nov 31-Oct Change
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Currency in Circulation 137,913 91,291 46,622
Total Demand & Time Deposits (55,351) (38,270) (17,081)
Broad Money (M2) 82,951 53,415 29,536
NFA 107,460 113,648 (6,188)
NDA (24,509) (60,232) 35,723
Net Government Borrowing 138,436 75,866 62,570
Borrowing for budgetary support 134,594 75,866 58,728
from SBP (443) (43,606) 43,163
from scheduled banks 135,037 119,472 15,565
Commodity operation 5,570 5,807 (237)
Credit to non-govt sector 43,584 44,576 (992)
to private sector (27,914) (23,348) (4,566)
to PSEs 72,301 68,727 3,574
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Source: SBP
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