The trend in monetary aggregates during the third quarter has changed, and it appears to be in the right direction. The most active player, the government, is, at least for the time being, moving away from inflationary central bank borrowing and instead relying more on scheduled banks and foreign inflows.
Meanwhile, wheat export has started unclogging the liquidity long-stuck in the quasi-fiscal commodity operations, and this has paved way for some un-seasonal rise in private credit.
Fiscal borrowing from the SBP declined by Rs 162 billion between December 24-Mar 12 and commodity operation credit slashed by Rs 76 billion. The government partly shifted the onus of its financing to scheduled banks by increasing its borrowing toll by Rs 142 billion in the said time. CSF flows helped NFA to increase by Rs 107 billion, while credit to the private sector rose by Rs 75 billion during December 24-Mar 12.
Inflation has tamed a bit in the past two months amid commodity price-led exports bonanza and increased inflow of remittances through banking channels - making external accounts reveal a positive surprise despite falling foreign direct investments.
The good news does not end here. The economic management trio at the helm - Hafeez Sheikh, Shahid Kardar and Nadeem-ul-Haque - has managed to convince the political leadership to take token steps to bring fiscal discipline, which, in turn, will help achieve financial stability.
In a candid talk back in November, the SBP Governor assured that economic managers at the SBP and the government are on the same page and working to bring the institutions in order and persuading politicians to focus on the economic agenda.
At that time, not much weight was being given to him based on past record. However, lately, the government has curtailed its borrowing from the SBP, the Ministry of Finance has met its T-Bills target, NSS is mobilising handsome funds, and some tax revenue enhancement steps and expenditure curtailment measures are being taken.
The long deliberation with the IMF concluded on a positive note, albeit, the fate of release of the last two tranches is contingent upon the implementation of RGST. Nonetheless, other multinational agencies, including the World Bank, ADB and IDB might release some of their budgetary support in this fiscal year from their medium-term budgetary support programme.
On the power sector, however, the effective dissolution of Pepco remains elusive. Still some steps have been taken after the talks with the IMF as regards the empowerment of boards of power discos. However, its effectiveness is yet to be seen. The government has decided to raise power tariffs by 2 percent a month to rationalise and plug in the circular debt. However, until and unless effective measures are taken to cement the production, distribution and transmission losses, the devil of circular debt will keep a check on economic recovery.
Like the summary of the energy sector, the short-term positive measures at the fiscal house do not ensure medium to long-term sustainability. These steps are applauded because of policy inaction in the first half of the current fiscal year and most of the last year.
The measures taken in the latter half of year will by no means enable the government to meet its fiscal deficit and inflation targets, while economic growth might not exceed the rate of population growth in FY11.
Understandably, Hafeez Sheikh and Shahid Kardar took their time after the sudden departure of their predecessors last year, to make their presence felt in the overall machinery of the state. But now that they are well grounded, the real test of their performance will be seen in FY12.
Will the government be able to implement RGST in the FY12 budget? Will agricultural income and real estate come into the tax net? Will there be effective reforms at FBR? Will the menace of energy circular debt come to an end? Will the privatisation programmes announced last week materialise? Clearly, these are important issues at hand.
And unless these issues are addressed, the hike in global oil prices and other external factors can bring the economy back to the stage of disarray. The central bank aptly summarised the picture in its policy review last week: "Given a favourable external current account position and relatively disciplined government borrowings from SBP, the immediate risks to macroeconomic stability seem to have subsided... however, there is little room for complacency as the risks to the economy may increase if meaningful economic reforms are not initiated to address the structural weaknesses".
The government borrowed heftily in the past two weeks with the focus skewed towards commercial banks (Rs75bn) while note printing was at Rs 38 billion. Commodity operations owing to export of wheat is reduced by Rs 26 billion. Some foreign flows pumped into the economy as NFA improved by Rs 30 billion but increase in CIC and government borrowing left nothing for the private sector as its credit fell by Rs 21 billion.
Currency in circulation increased by Rs 43 billion for the last two weeks while demand and time liabilities rose by Rs 57 billion. The overall money supply increased by Rs 100 billion for the two weeks ending Mar 12.
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KEY MONETARY AGGREGATES AS ON MAR 12
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Rs (mn)
12-Mar 26-Feb Change
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Currency in Circulation 275,231 232,132 43,099
Total Demand & Time Deposits 264,683 208,112 56,571
Broad Money (M2) 545,514 444,626 100,888
NFA 176,189 146,157 30,032
NDA 369,326 298,469 70,857
Net Government Borrowing 321,186 233,282 87,904
Borrowing for budgetary support 438,288 325,223 113,065
from SBP 109,571 71,807 37,764
from scheduled banks 328,717 253,416 75,301
Commodity operation (120,668) (94,667) (26,001)
Credit to non-govt sector 215,759 230,573 (14,814)
to private sector 188,136 208,767 (20,631)
to PSEs 27,281 21,454 5,827
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Source: SBP
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