Analysis: Pakistan Broad Money (M2) position
By: Riffat Mughal
Pakistan's broad money (M2) grew by 15.89 percent to Rs 917.961
billion during FY11 as against 12.46 percent to Rs 640.015 billion in
FY10, State Bank of Pakistan (SBP) provisional data revealed.
Monetary impact since July 1, 2011 till August 20, 2011 has seen a
decline of 1.45 percent or Rs 96.854 billion as compared to 2.04 percent
Rs 118.050 billion turn down reported on August 20, 2010.
What is Money supply?
Money supply is the aggregate amount available in an economy at a
particular point in time. The factors that lead to increase broad money
in the country include high Net Foreign Assets (NFA) and ever increasing
government borrowings from the banking system.
Provisional Data on Monetary Aggregates as on August 20, 2011
The provisional data issued by SBP revealed that broad money is
consist of currency in circulation, other deposits with SBP and total
demand and time deposits (including Residents Foreign Currency Deposits
(RFCDs) excluding inter-bank deposits, deposits of governments and
foreign constituents). As on August 20, 2011 FY11 currency in
circulation surged to Rs 88.852 billion as compared with Rs 79.261
billion recorded on August 20, 2010. However, other deposits with SBP
declined to Rs 0.623 billion during the first quarter of FY11-12 (1Q
FY11-12) from Rs 0.014 billion 1QFY10-11.
Net Foreign Assets
Net Foreign Assets (NFA) of the banking system surged by 375.67
percent to Rs 235.108 billion in FY11 monetary policy impact on August
20, 2011 showed NFA declined by 60 percent to Rs 24.438 billion.
According to World Bank, "Net foreign assets are the sum of foreign
assets held by monetary authorities and deposit money banks, less their
foreign liabilities."
Net Domestic Assets
Net Domestic Assets (NDA) of the banking system grew by 15.62 percent
to Rs 682.853 billion in FY11. The data on monetary policy impact on
August 20, 2011 showed increased of 26 percent to Rs 72.416 billion.
NDA is the sum of net government sector borrowings, credit to non-
government sectors and Other Items. It is also defined as the difference
between money supply and net foreign assets of a country.
Net Government Sector Borrowings
The rising Net government borrowings has fueled up the inflation as
during FY11 it reached to Rs 579.571 billion, a surged of 42.53 percent
as compared to last year's of Rs 406.636 billion.
Government borrowings from SBP
Government borrowings from SBP has declined as govt. deposits shows a
credit balance of Rs 7.991 billion in FY11 while in the previous year
their debtor/withdrawal from the system was Rs 44.005 billion, which is
a good sign.
However, as of August 20, 2011 it declined to Rs 2.954 billion as compared with Rs 134.034 billion recorded on August 20, 2010.
Government borrowings from Scheduled banks
Furthermore government borrowings from Scheduled banks climbed by
108.83 percent to Rs 598.156 billion against Rs 286.433 billion in the
corresponding year. This indicates that government shifted their stance
and instead of borrowing money from SBP, it preferred to have loans from
scheduled banks that transferred the burden on them. This not only
reduced commercial banks ability to grant loans to other sectors
specially corporate sectors which hinder their growth and directed
towards poor GDP.
Besides that in current quarter as on August 20, 2011 it reached up
to Rs 126.034 billion against last year's as government deposited Rs
40.288 billion during the previous year. Another alarming situation saw
by the economists which hinder economic growth of the country.
IMF decision not to grant funds
International Monetary Fund (IMF) decision not to grant further funds
to Pakistan would further deepened the crisis and this would lead to
increase in government borrowings.
Borrowings for Budgetary Support
In addition, the central and scheduled banks lent over Rs 590.165
billion to the government for the budgetary support that consumed Rs
330.437 billion during the same period last year.
SBP slashed 50bps
In the last monetary policy SBP decision to lower policy rate by 50
basis points (bps) to 13.5 percent would further add to the inflation.
Analysts warned the country that the decision especially in the month of
Ramadan when food prices are at hike, further heighten the inflation.
Even, other inflationary factors that contribute highly include
government borrowing from the banks that strike badly to poverty
stricken areas in Pakistan.
Government sector borrowings from commodity
Government sector borrowings from commodity operations has shown
government deposits, a credit balance of Rs 15.703 billion, a decline of
120.40 percent during the period under review as compared to last
year's withdrawals of Rs 76.989 billion. While monetary impact since
July 1, 2011 data revealed that government deposits increased by 69.69
percent to Rs 0.487 billion on August 20, 2011.
Credit to non-government sector
Credit to non-government sector turned down by 20.50 percent to Rs
158.049 billion during the FY11 while in FY10 it was recorded as Rs
198.806 billion. This declined demonstrate that higher government
borrowings left lesser amounts to banks which can be provided to other
sectors. Unavailability of funds for investments and availability of
loans at higher rates discourage local industries to participate
actively in the growth of the country.
Future Outlook
Economists major concern towards economy declining GDP and their
anticipations that this would not only create crowding out impact on the
private sector but also fuel inflation. Higher monetary expansion
coupled with rising oil prices, food prices and power tariffs would
disturb the country and its people making their lives into trouble.
Future outlook of the country seems to be dwindled as the current
scenario of the economy already predicted the chances of lower economy
growth not only in comparison with past years but also with other
regional countries who has reported remarkable growth during FY10-11.
Pakistan reported meager 2.4 percent GDP for FY10-11 while other nations
including Bangladesh recorded 6 percent growth and India's around 7.5
percent.
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