The rupee has been gaining strength in the open market; the flurry of foreign inflows is helping KSE 100 index to hover around the 10000 points level; the current account deficit is gradually falling; and so is the country''s sovereign risk premium. Seldom does one see so many positives at a time in Pakistan, but even this is not enough to offer any respite to the money market.
The three triggers that can put life into the money market are: liquidity, liquidity and liquidity. Apart from the release of pending CSF and FoDP money, the government ought to ease liquidity in the market by retiring its heavy commodity financing, which stood at Rs 270 billion (average year-end financing in the past years was Rs 100 billion). The former Finance Minister had plans to offload wheat stocks by March-April, even if the government had to sell it at a discount.
Now, to resolve the mounting circular debt and fresh financing for wheat procurement, the new Advisor, Hafeez Sheikh, should take prompt actions to inject some liquidity into the system. The strategic dialogue, this week, would be imperative on release of the US portion of FoDP aid.
In the latest PIB auction, cut-off for the ten-year paper soared by 22 bps to 12.75 percent. Treasury bills followed similar path, as both six months and one year yields in the secondary market increased by 13-25 bps during the past four weeks. The volumes, however, remained abysmally low as market participants will have the opportunity to borrow in the upcoming auctions, comfortably.
The much awaited inflow of $350 million materialised last month, but only to be used by the government to retire its borrowing from the central bank. However, the currency market welcomed this supply along with a slash in demand and panic selling.
Pakistan is all set to receive yet another IMF tranche, amounting to $1.2 billion, next month, out of which, around $370 million for bridge financing will be used for fiscal support. Again, the fate of this money would just be a replay of the CSF episode. Nonetheless, this will help the rupee to remain stable--around 83.50-84.50 levels--in the coming few weeks.
But the strengthening of rupee and better current account balance might not excite the money managers on Saturday''s policy review. Status quo is likely to prevail. The inflation rate over 13 percent amid government''s persistent reliance on domestic savings for fiscal financing is more likely to outweigh the other positive indicators, come Saturday. People will have to possibly wait for May''s policy review for a downward revision in the policy rate. Inflation for March and April would be in the range of 11.5 to 12.5 percent owing to the high base effect of last year and no significant change in utility tariffs. This, coupled with a stable rupee ahead, might propel the central bank to slash the discount rate by 50 bps in May''s policy review.
Any foreign flows from friends or CSF before May''s review will provide some fiscal space and strengthen the possibility of a rate cut. However, there are many ifs and buts, given the volatile nature of economic recovery, which is still overly dependent upon international commodity prices and foreign flows. The bleak security situation just adds to the economic woes.
Money aggregates
Right after the CSF inflows, net foreign assets have shown a sorry figure in the very next week. For the first nine weeks of this quarter, NFA posted a decline of Rs 56 billion. Barring the one-off CFS inflow, the toll increased to Rs88 billion. Nothing better is in the offing for the remaining three weeks of the third quarter, although IMF''s bridge financing amount, to be released in April, will provide breathing space to this falling spree.
Similarly, after retiring Rs 24 billion during previous week, the government went back to knock the familiar doors of the central bank for financing of its excessive fiscal spending, as for the week ending March 6, fiscal borrowing from SBP stood at a hefty Rs 67 billion. Now, Rs 171 billion, borrowed in the last nine weeks, ought to be levelled off in the coming three weeks.
Fiscal managers are left with the commercial banking avenue after exhausting profits from SBP and other non-banking channels to net off the central bank borrowings. Hence, Rs 35 billion net retirements from scheduled banks might well be in the green by the quarter-end.
This crowding out would reduce the already squeezed liquidity pie for the private creditors. With only Rs 9 billion credited to the private sector last week, the sector''s total borrowing stood at mere Rs 37 billion for the quarter, to date
In an ideal world, the improvement in macroeconomic fundamentals not only enhances the appetite of corporate sector but also reduces the reluctance of banks to lend. But we don''t live in an ideal world - far from it. The government''s borrowing needs and re-emergence of the circular debt devil cast doubts on a rapid industrial sector recovery.
Feedback at ali.khizar@br-mail.com
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KEY MONETARY AGGREGATES
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Rs (mn) AS OF
6-Mar 27-Feb Change
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Currency in Circulation 191,085 156,164 34,921
Total Demand & Time Deposits 121,931 125,672 (3,741)
Broad Money (M2) 321,614 291,454 30,160
NFA 60,774 60,441 333
NDA 260,840 231,013 29,827
Net Government Borrowing 240,123 184,013 56,110
Borrowing for budgetary support 297,943 237,498 60,445
from SBP 127,835 60,957 66,878
from scheduled banks 170,108 176,541 (6,433)
Commodity operation (56,498) (52,081) (4,417)
Credit to non-govt sector 223,067 226,656 (3,589)
to private sector 146,499 137,667 8,832
to PSEs 76,837 89,185 (12,348)
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Source: SBP
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