The money supply growth is shrinking this fiscal year so far whilst the lion’s share of the tiny increase is taken by currency in circulation leaving the deposits to virtually stagnate since Jul17. Barring foreign currency deposits, the domestic deposits base actually shrank during July 1 to December 15 2017.

The deposit base increased by a mere Rs13 billion in FY18 till December 15 versus Rs138 billion in the corresponding period last year. The number may change by December end as banks are habitual window dressers - they may do this in the last two weeks of the calendar year to beautify the full year accounts. This happened in CY16, for details read “Banks: window dressing” published on January 13 2017.

History may repeat itself. But growth in deposits is too low in the last few months and may remain visible even after window dressing. The deposit base numbers published by the SBP do not show any sign of concerns as the year on year growth in deposits stood at 12 percent in October 2017, which is in line with overall monetary growth.

The worrisome fact is the slowdown in this fiscal year so far. The overall M2 growth is too low between Jul-Dec - M2 increased by Rs127 billion (0.87%) versus Rs343 billion (2.68%) in the corresponding period last year. And that partially explains low growth in deposits - but within it 90 percent of increase went out of the banking system.

Hence, both low money creation and within it enhanced informality explains low deposits growth. Let’s try to dissect both assets and liabilities sides of M2. The low M2 growth is primarily due to higher contraction in net foreign assets (NFA) and low budgetary financing by the federal government to thin the growth in net domestic assets (NDA).

The NFA contracted by Rs150 billion this fiscal year so far versus decline of Rs50 billion in the corresponding period last year. The slippage in current account deficit resulted in the fall in foreign exchange reserves and hence the decline in NFA. Thus, more money is going out of the country to pay heightened imports and this is making the life of liability side bankers difficult, as they are missing year end targets.

The fiscal deficit financing from banking system is relatively low to date this year (Rs364bn) versus the same period last year (Rs521bn). Since the government is borrowing less, the counterpart deposits creation is low too. The good news is the credit extended to private sector is relatively better this year; but the toll is too low relative to government borrowing to positively impact deposit creation.

This explains the low deposit creation despite the fact that LSM is growing at robust pace and private credit is picking up.

Let’s delve into the details of monetary liabilities. The problem here is more profound and outcomes are intuitive. Ninety percent of M2 growth went into CIC; this implies that people are not interested in keeping incremental money in the banking system.

The phenomenon of high CIC growth started since FY16 when WHT was imposed on all banking transactions. In FY16, half of the M2 flows went into CIC, the toll was reduced to one third in FY17. Given no adverse change in WHT, why 90 percent on M2 is going into CIC now?

Some of this may get corrected by window dressing in the last two weeks of calendar year; but the increase is exceptional. This can be linked to asset price suppression in real estate and stock market; and the fear of currency depreciation is keeping savors at bay from rupee denominated instruments.

The argument of currency depreciation is augmented by the fact that resident foreign currency deposits (RFCD) are increased by Rs50 billion in the fiscal year so far, making the rupee based deposits lower by Rs37 billion. A parallel can be drawn for money going out of the system. BR Research’s hunch is that most of the increase in CIC is being transferred into foreign currency and people are keeping in lockers at banks and homes.

It is intuitive, domestic assets are not giving returns they used to till the last year amid the balance of payment worries are making currency depreciation inevitable. It is rational for people to convert money to foreign currency. Few are doing in formal system, evident by sharp jump in RFCDs and rest fear the FBR and foreign currency freeze to keep dollars figuratively under the mattress.

The good news is that the currency has depreciated by a bit; and the NFA contraction declined by Rs229 billion in the first week of December on account of money coming in the form of Euro bond and Sukuk. The counterpart in rupee will soon have its multiplier impact to make deposits position better. And with steps taken to curb current account deficit, deposits may grow. Lesser the NFA decline, better the deposits growth. Good luck to branch bankers for the ongoing week.