KARACHI – Pakistan’s banking sector is feared to weaken as money supply, propelled by the ever-increasing government borrowings, remains on the higher side. According to provisional data of the State Bank of Pakistan (SBP), the Broad Money (M2), an economic indicator, showing liquidity in the economy, has soared to an alarming 9.44 percent to Rs 545.515 billion during July-March 12 FY11.
Last year, during July-March 13, the M2 had grown by 6.72 percent to Rs 345.093 billion. This shows that money supply had registered an upsurge of 58.07 percent or Rs 200.42 billion during the current year. Given the prevailing upward trend in money supply, analysts view the “corruption-driven” double-digit inflation hitting new highs in the near future.
Analysts are also concerned that the exorbitant growth in M2 would ultimately weaken the country’s ever-flourishing banking sector by eroding their saving base. “This would weaken the saving base of the banking sector, while the assets deposit ratio would also be affected adversely,” Asfar Bin Shahid opined. The analyst said that high inflation was compelling people to rapidly consume their savings, something that increases money circulation in the country.
“People are coming out with more and more money to buy things that erode their savings,” AB Shahid said that such higher growth in money circulation could never be deemed as a favourable gesture for the ailing economy. The SBP calculations show that, during the period under review, over Rs 275.23 billion were circulating in the country against Rs 188.8 billion in the last corresponding period. This depicts a growth of 46 percent or Rs 86.42 billion.
The analyst suggested that growth in money circulation must be proportionate to the country’s GDP growth. “If money supply grows in proportion to GDP growth, prices would remain stable in the country and vice versa,” he said. Regarding inflation, the analyst said the prevailing price hike in the country was due to corruption and not supply shortage.
“Yes!” he said when asked if the menace could be attributed to “manipulation” of prices by market players. “Inflation is not shortage driven but corruption driven and (if not arrested) would further move up,” he warned. Further, there has been no respite in inflationary government budgetary borrowings from the banking system that appears to be a primary disturbing source for supply of money in the country.
According to State Bank, the cash-strapped federal and provincial governments borrowed over Rs 444.11 billion from the banking system during July-March FY11, compared to Rs 313.96 billion in the last corresponding period. “Much of the government money is blocked in commodity operations – something that pushes the government towards greater borrowings,” Shahid viewed.
Warning economic mangers that with each passing month interest rates on the bank loans were piling up thus becoming backbreaking, the analyst said that it would have been great, had the government used bank loans for increasing “productive capacity”. “Unfortunately, this (borrowed money) is going towards financing consumption that is horrible,” AB Shahid said.
The Net Foreign Assets (NFA) is another indicator that, some analysts view, was increasing the size of Broad Money in the country. According to central bank data, during the said period, NFA of the country’s banking system had increased to Rs 176.189 billion against minus Rs 37 billion during the same period in FY10.
A record $6.9 billion worker remittances, which the government are all set to cross the historic $11 billion mark this year, are believed to have been pushing the NFA up. On the other hand, during the review period, Net Domestic Assets (NDA) of the banking system continued to decline and dipped to Rs 369.32 billion. Last year, the same stood at Rs 382.16 billion.
Economic observers believe that deterioration in economic indicators like M2 is pointing at the fact that inflationary pressures would keep haunting the poverty-stricken people of Pakistan in the foreseeable future.
