Money supply which virtually remained unchanged in the first quarter of this fiscal year, up by 6.5 percent (Rs 335 bn) in the second quarter is a good omen for the economy which is in the slow process of recovery after a dismal performance last year. To add more, this surge in liquidity primarily emanated from the backbone of economy - private sector.
Government borrowing for fiscal support also jumped three folds in this quarter; however, essentially muted foreign inflows forced the government to borrow more from the banking system. Nonetheless, government borrowing from commercial banks was even higher in the first quarter versus the second quarter.
After private sector, the most profound, but worrisome change, was in the net foreign assets. The delay in US coalition support fund, silence from friends of Pakistan (FoDP), and falling FDI had not let the economy recover as swiftly as one would have liked. NFA, after increasing by Rs 132 billion in Jul-Sep, fell by Rs 15 billion during October-December period.
The hopes of this nascent economic recovery in the second half of this fiscal year are tied with foreign inflows. The materialisation of over Rs 150 billion, allocated from the FoDP in the development head for FY10 fiscal budget seems to be a daydream which doesn''t come true that often. This will not only circumscribe the development expenditure but would potentially slip the fiscal deficit further.
However, over $750 million (Rs 62 billion) received in bridge financing for fiscal support from IMF slightly healed the wounds and allowed the government to spend on prioritised social spending--like on IDPs and other poverty eradication programs. But, most likely, the long-term development projects will be shelved for this fiscal year.
Let us not delve into the tale of development spending, rather envisage the monetary movement in the remaining half of this fiscal year. The State Bank in its recently released quarterly report projected M2 to grow by 12-13 percent this year. With 6.5 percent growth already achieved in first half; the money supply is expected to increase by Rs 300-325 billion in January-June period.
Interestingly, all the growth in money supply for the first half was confined to the second quarter. And, if the foreign flows remain muted in the second half, the recovery for private sector witnessed in the last quarter might be reduced to half in the coming quarters.
Hence, to spur the recovery process in the second half, it is imperative to have foreign funds. The resolution of US officials'' visa issues and other small conflicts to facilitate the US coalition support fund and other military support funds is necessary for private sector credit growth.
Unlike the first quarter, where low demand and reluctance of banks to lend was the root cause for fall in private credit, excessive government reliance on commercial banks by borrowing Rs 87 billion crowded out the private investment in the last quarter. And this trend will be more vocal in the coming quarters, as government expenditures are inflexible amid fall in domestic savings.
Any foreign flows are not likely to change the overall money growth as significant as they change the course of money flow. For instance, receiving $500 million (Rs 42 billion) from coalition support fund will reduce government borrowing pressure from the central bank and commercial banks and will channel domestic liquidity towards the private sector. The multiplier effect will do the rest.
Also, by reducing the domestic borrowing pressure of fiscal deficit, it will facilitate the central bank to give more weight to weak private sector credit for making its policy rate decision in its upcoming reviews. The SBP, which reduced its policy rate by 150 bps in a staged manner during 1HFY10, has the room to further revise it by 100 bps in second half. However, the direction of international commodity prices and foreign flows will be the key to its decision.
======================================================
Rs (bn) Q1 Q2 H1
======================================================
NFA 131,894 (14,688) 117,203
Fiscal Borrowing 44,126 118,140 162,266
from SBP (73,555) 30,741 (42,814)
from comm banks 117,681 87,399 205,080
Credit to private sector (78,319) 187,558 109,239
M2 (1,263) 335,430 334,167
==============================================================
KEY MONETARY AGGREGATES
==============================================================
Rs (mn) AS OF
==============================================================
2-Jan 26-Dec Change
==============================================================
Currency in Circulation 149,082 167,638 (18,556)
Total Demand & Time Deposits 184,440 99,053 85,387
Broad Money (M2) 334,167 267,045 67,122
NFA 117,206 75,541 41,665
NDA 216,961 191,503 25,458
Net Government Borrowing 152,639 253,541 (100,902)
Borrowing for budgetary support 162,266 264,484 (102,218)
from SBP (42,814) 58,076 (100,890)
from scheduled banks 205,080 206,408 (1,328)
Commodity operation (8,300) (9,612) 1,312
Credit to non-govt sector 201,976 146,180 55,796
to private sector 109,239 65,102 44,137
to PSEs 93,543 81,858 11,685
--------------------------------------------------------------
Source: SBP
==============================================================