State Bank in both its monetary policy review and quarterly report has clearly shown the limitation of its policy actions owing to poor fiscal health. Fiscal spending (debt servicing and war on terror expenditure) and quasi fiscal needs (twin circular debt) amid the elusive Friends'' of Pakistan ought to crowd out private borrowers, was the gist of SBP''s concerns.
The Central bank has also shown concerns on the resurgence of inflation. But the mesmerised board could not take one side on curbing inflation owing to passing on subsidies and rally in crude by increasing the policy rate or to ease liquidity by a downward adjustment in discount rate.
Inflation which touched single digit in October 09 was climbing the ladder since then and was over 13 percent in January and February. A host of reasons including low base effect, alignment of electricity prices to market forces and revision in gas and petroleum product prices amid rising crude were responsible for upsurge in inflation.
March inflation is likely to be below 13 percent and might be below 12 percent in April. Petroleum prices which, on average, increased by 5 percent for the month of April will be recorded in March numbers. With a 4 percent weight in Consumer Price Index, its contribution in monthly CPI comes around 0.2 percent.
Sensitive price index which has a high correlation with heavy weight (40%) food component of CPI is increased by 0.77 percent from February 11- March 11 - might contribute 0.3-0.4 percent surge in monthly headline numbers.
CPI in March is likely to be 0.7 - 0.9 percent higher than that in February which implies a 12.3 - 12.5 percent hike in prices, year-on-year. Rupee, on the other hand, which was strengthening, lately, touched its calendar year low value of 83.75 on March 25 is weakened again by 0.8 percent since then, particularly after the news of delay in IMF''s fifth tranche decision.
Whereas, stock market is on roller coaster, thanks to foreign buying. One can argue that this foreign funds spree is spread across the emerging economies; Pakistan is just getting peanuts as MSCI world is at 18 months high and Dow Jones approaching the 11,000 mark. That argument gains weight on SBP''s harsh tone in its latest publications and rupee''s southward movement last week.
However, the chances of IMF to take fifth tranche decision in third week of April is gaining strength, while government is bullish on release of around $1 billion on pending war related disbursements and Kerry-Lugar money within this fiscal year.
But the promises are not enough to resolve the tight liquidity in the money market, nor can they dictate the fate of the rupee. Yes, even half a billion dollars from US and around $370 million bridge financing from IMF as a part of IMF''s fifth tranche will provide adequate supply in currency market and some breathing space for the private sector.
Without these, higher oil imports and slowdown in remittances and possible erosion in textile exports as interest subsidy to this sector is gradually shaving would do no good to the nascent economic recovery.
MONEY AGGREGATES:
The currency-in-circulation kept on its random walk as after an increase of Rs33 billion in the previous two weeks, Rs21 billion was poured into the system for the week ending March 20. Overall Rs167 billion has been taken out of the system this fiscal year which is very much in line with the numbers last year.
Demand and time liabilities depicting the sorry picture of liquidity in the system declined by Rs22 billion as both NFA and NDA fell last week despite that currency was being pumped in the system.
Foreign assets, in the absence of aid and soft loans, on net basis were down by Rs22 billion and this trend may not be averted, at least, for coming 4-5 weeks.
On the domestic side, government borrowing from the central bank and commercial banks fell by Rs11 billion and Rs13 billion, respectively. Commodity operations which on average declined by Rs6 billion for the previous seven weeks, down by mere Rs 2 billion last week. It will be interesting to watch this trend in coming weeks, as on one hand, low retirement is pain in the neck for SBP, on the other, fresh financing for wheat procurement might start by the end of April.
Feedback at ali.khizar@br-mail.com

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Currency in Circulation
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Rs (mn)                                AS OF
                                  20-Mar    13-Mar    Change
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Currency in Circulation          167,587   188,803  (21,216)
Total Demand & Time Deposits     125,314   147,713  (22,399)
Broad Money (M2)                 294,259   345,092  (50,833)
NFA                               48,575    70,281  (21,706)
NDA                              245,685   274,812  (29,127)
Net Government Borrowing         236,797   249,397  (12,600)
Borrowing for budgetary support  301,323   312,100  (10,777)
from SBP                         128,500   141,738  (13,238)
from scheduled banks             172,823   170,362     2,461
Commodity operation              (63,556)  (61,724)  (1,832)
Credit to non-govt sector        214,224   223,515   (9,291)
to private sector                138,378   146,650   (8,272)
to PSEs                           75,067    76,945   (1,878)
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