Money supply contracts in July

KARACHI: Broad money registered a decline of 1.98 per cent in the first month of the current fiscal year. Data released by the State Bank of Pakistan (SBP) revealed that M2 declined by Rs114.169 billion in July. During the same time, currency in circulation increased by Rs38.728 billion and other deposits with the SBP increased by Rs50 million. However, total demand and time deposits decreased by Rs152.947 billion.

According to the central bank, net foreign assets of the banking system registered a decline of Rs11.681 billion, while net domestic assets of the banking system reduced by Rs102.488 billion. Decline in credit to the private sector contributed a major chunk to the shrinkage in domestic assets of the banking system. Credit to the private sector fell by Rs49 billion in July.

Analysts have commented that although broad money has shrunk in the first month of the current fiscal, the trend of M2 growth over the entire year will continue.

Economist Asad Farid told The Express Tribune “M2 normally comes down in the first month because the private sector completes repayment of outstanding loans and credit lines they have obtained from the central bank towards the end of the previous fiscal year.”

Provisional estimates of broad money growth for FY10 issued by the central bank stand at 12.46 per cent, amounting to Rs640.012 billion, as compared to growth of 9.56 per cent in FY09, amounting to Rs448.076 billion.

Analysts have asserted that broad money growth in the current fiscal may top 13 per cent. “Last year, the bulk of government borrowing was for meeting working capital requirements,” commented Farid. “This year we can already see many more development expenses arising such as rehabilitation of flood-affected areas,” he added.

Published in The Express Tribune, August 5^th, 2010.