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Review of monetary and credit developments

During the period July-April, FY2019 the Ministry of Pakistan mentioned in a report that the money supply (M2) rose by Rs 625.3 billion as against with Rs 601.8 billion in the same period of previous year. Net Domestic Assets (NDA) is the main contributor to M2 growth. Net Foreign Assets (NFA) point contribution is pessimistic and reached at (-5.5 percent) during the period under review as compared with (-3.3 percent) in the corresponding period previous year. NDA point contribution has risen to 9.4 percent as against with 7.4 percent previous year. NDA point contribution growth partially offset by NFA pessimistic growth, thus overall money supply rose by 3.9 percent during the period under review. On the other hand, reserve money recorded an expansion of Rs 488.0 billion (growth of 8.9 percent) during July-April, FY2019 against Rs 260.5 billion last year.

Experts also explained that the State Bank of Pakistan has adopted policy rate reversal and slowly increased it by a cumulative 650 bps since January, 2018. Despite rise in policy rate, Weighted Average Lending Rate (WALR) remained stable which translated into healthy private sector credit demand. Credit to private sector (CPS) rose to Rs 775.5 billion during FY2018 as compared to Rs 747.9 billion last year. Significant rise in credit demand primarily came from working capital and fixed investment in the preceding year. During the period July-March, FY2019 CPS rose to Rs 554.7 billion as against to Rs 401.1 billion during corresponding period of previous year. Of which working capital loans received the major share and reached at Rs 369.0 billion as against to Rs 215.3 billion last year. Furthermore, fixed investment decelerated to Rs 83.1 billion as compared to Rs 148.1 billion in the same period previous year.

SBP’s NDA recorded a growth of 22.5 percent as against with 18.18 percent during the corresponding period previous year. SBP’s NFA was declined to Rs 743.8 billion as against with contraction of Rs 473.7 billion in the corresponding period previous year. Therefore, reserve money growth stemmed from NDA of the SBP whereas NFA outstanding stock remained negative during the period under review. Within Broad Money, NFA of the banking sector further contracted to Rs 882.4 billion during the period FY2019. During same period last year, it was contracted by Rs 475.4 billion. Therefore, SBA and scheduled bank’s NFA remained pessimistic during the period under review. During the same period NDA of the banking sector recorded an expansion of Rs 1,507.7 billion as against with Rs 1,077.2 billion during the corresponding period last year. NDA of SBP rose by Rs 1,132.5 billion as against with Rs 661.5 billion during corresponding period previous year. The NDA of scheduled banks witnessed an expansion of Rs 375.1 billion as against to expansion of Rs 415.7 billion in the corresponding period of previous year.

 

Credit to Public Sector Enterprises (PSEs) rose by Rs 312.1 billion during the same period FY2019 as compared to Rs 153.2 billion during the corresponding period previous year. Moreover, sources mentioned that the federal government of Pakistan has planned to borrow a record Rs 7 trillion from the domestic banking sector during first quarter of (July-September) of this fiscal year (FY20) to meet its financial needs.

Economists said that with limited external financing and continued revenue shortfall has compelled the federal government to improve its reliance on the domestic banking system. After huge borrowing of Rs 3.3 trillion from SBP during the last fiscal year, the federal government has also planned re-profiling of government debt from SBP to banking sector to meet the IMF condition. The State Bank has issued two calendars for the auction and according to these calendars, cumulatively the federal government will borrow some Rs 7 trillion form banking sector during July-Sep of FY20. Auction for MTBs will be held fortnightly and totaled 7 auctions have been proclaimed by SBP for the period under review. However, the SBP has given tentative target of six auctions and the target for the last auction of this quarter, scheduled on Sep 25, 2019, will be announced later.

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Economists also revealed that most of amount would be increased through auction of short term government papers. The government has also decided to borrow Rs 6.3 trillion from banking sector through sale of Pakistan Market Treasury Bills of 3-Month, 6-Month & 12-Month in July-Sep of FY20. It is also recorded that the proposed amount includes maturing amount of Rs 5.065 trillion and an additional requirement of some Rs 1.234 trillion. First auction for the bills has already been conducted on July 3, 2019, while second auction is scheduled for July 17, 2019 for sale of Rs 600 billion worth MTBs. Third auction will be held on July 31, 2019, with a tentative target of Rs 1.5 trillion. On the other hand, two more auctions will be held on August 13 and August 28, 2019 for borrowing of Rs 2.6 trillion and Rs 500 billion respectively. Sixth auction for this quarter will be held on Sep 11, 2019 for 500 billion. According to the SBP, an amount of Rs 300 billion will be increased by auction of 3-, 5-, 10- and 20-year PIBs (Fixed Rate) and some Rs 400 billion by auction of PIBs (Floating Rate) during this quarter.

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