Foreign inflows finally poured in the week ending February 27. While it triggers some positive sentiments for the moment, it isn't enough for the system to sustain itself unless more money flows in. Net Foreign Assets rose by Rs31 billion, thanks to CSF payment. This helped reduce government borrowing from SBP by Rs24 billion.
However, the quarter to-date numbers still show a net NFA outflow of Rs57 billion - a figure that is set to increase in subsequent weeks as nothing substantial was received on the overseas counter between February 27 and March 13. The pause in NFA inflows implies that the government will have to find other avenues to retire Rs75 billion borrowed from SBP soon (by March end).
The toll of this debt taken in the last eight weeks will likely rise before the government lowers it below zero on a quarterly basis. In the last week of second quarter, the government retired Rs102 billion, and a similar pattern is likely to be followed at the end of this quarter as well.
The government transferred Rs70 billion and Rs65 billion in each of the last two quarters from State Bank's profits to net off its borrowing from the central bank. The fate of this quarter seems to be no different. The remaining amount might be raised from scheduled banks resulting in the crowding-out phenomenon yet again.
Fiscal financing from commercial banks was mere Rs4 billion in the week under consideration. After a hefty borrowing of Rs87 billion in the previous quarter, the government retired Rs29 billion in the last two months of the amount it owes to scheduled banks.
Crowding out is not visible so far in this quarter. The government managed to raise Rs19 billion during January from non-banking channels, primarily National Savings Scheme - the same as the monthly average of first half of this fiscal year.
But, with not much difference expected from NSS in Feb-Mar, it's likely that the government has pursued commercial banks in March to-date and will continue to do so until the end of this month.
Nonetheless, private creditors borrowed Rs21 billion during the week ending February 27, which is much higher than the average borrowing of Rs7 billion seen in the last two months. Thus, a hike in net foreign assets and the slight pick up in credit by corporate sector despite the reduction in the government's central bank borrowing, helped demand and time liabilities of commercial banks rise by Rs51 billion. The multiplier effect may further increase bank deposits in the coming weeks.
INFLATION UPDATE:
The July-February inflation of 12.7 percent implies that the full-year number would likely come down to 11.5 -12 percent by June, as threats of second round of inflation and the scheduled increase in electricity prices in April, will be likely mitigated by the high base effect.
The trimmed core inflation, which had surged abruptly by 230 bps to 12.7 percent during January, is back on a downward trajectory - rising by 12.4 percent last month. On the other hand, non-food, non-energy inflation - unadjusted for volatility - kept on its smooth downhill journey towards 10.1 percent in February from 14 percent at the start of this fiscal year.
Now the question comes to mind, what does all this math mean? Well, low inflation in February certainly weakens the hawkish stance of monetary managers, but it might not allow the central bank to ease its base rate in its upcoming review.
Feedback at ali.khizar@br-mail.com

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KEY MONETARY AGGREGATES
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Rs (mn)  AS OF
  27-Feb 20-Feb Change
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Currency in Circulation 156,164 170,915 (14,751)
Total Demand & Time Deposits 125,672 74,639 51,033
Broad Money (M2) 291,454 247,124 44,330
NFA 60,441 29,188 31,253
NDA 231,013 217,935 13,078
Net Government Borrowing 184,013 209,767 (25,754)
Borrowing for budgetary support 237,498 257,747 (20,249)
from SBP 60,957 85,035 (24,078)
from scheduled banks 176,541 172,712 3,829
Commodity operation (52,081) (46,553) (5,528)
Credit to non-govt sector 225,656 202,286 23,370
to private sector 137,667 116,644 21,023
to PSEs 89,185 85,824 3,361
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Source: SBP
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