The backbreaking inflation in the country might have eased to a single digit figure in terms of Consumer Price Index (CPI), but the current alarming growth in monetary expansion is posing a visible threat to macroeconomic stability in the fragile economy.
According to central bank data, broad money, which is indicative of the supply of money in the economy and is also called M2, grew by seven percent or Rs 535.232 billion during the period ranging from July 1 and January 11 of the current fiscal year. This shows a growth of 2.72 percent or Rs 248.38 billion when compared with 4.28 percent, or in monetary terms, Rs 286.851 billion of the corresponding period of the previous year.
Whereas the period under review saw the cash-strapped federal and provincial governments’ inflationary borrowings from the central bank contracting to a positive zone, the currency in circulation ballooned by an alarming 57 percent or by Rs 101 billion to a massive Rs 278 billion.
The months in review last year had seen currency worth Rs 177 billion circulating in the local money market. This increased supply of money may cause the currently-subdued inflationary pressure to bounce back.
Though most economic observers do not buy it, government claims to have reduced its reliance on the State Bank to cater to its ever-burgeoning budgetary needs. The SBP figures for the review period show that the funds-starved government still maintains a credit balance of Rs 165 billion with the central bank. Discarding any conspiracy theories, this is a very encouraging scenario compared to last year when the same period had seen the resource-constrained government borrow over Rs 173.6 billion.
But analysts smell something bad in these numbers saying the democratically-elected government, which is going for balloting in a few weeks’ time, was indirectly borrowing from the State Bank.
The critics suspect the government tends to neutralize inflationary impact of its huge bank borrowings by raising money from the scheduled banks who in return receive the credited billions from the central bank in the face of weekly injections of billions of rupees liquid cash in the system.
The SBP data on the scheduled banks’ budgetary lending to the government put enough weight behind this perception. During July-Jan, the government borrowed over Rs 794 billion as against Rs 603 billion in FY12. The Rs 794 billion raised this year shows an upsurge of over Rs 191 billion over the same period last year. Wednesday also saw the government auctioning the Market Treasury Bills (MTBs) to the tune of Rs 313 billion to primary dealers, most of them being scheduled banks.
The risk-averse banks offered Rs 470 billion to the government which, however, accepted bids of the above worth.
This excessive investment in the risk-free government securities has reflected positively on the banks’ Net Domestic Assets (NDAs) that, according to SBP, swelled beyond Rs 535 billion compared to last year’s Rs 459 billion. To the contrary, the Net Foreign Assets (NFAs) of the banks depleted to negative Rs 323 million against negative Rs 173 billion in FY12.
The official data reveal that the government, through the central bank, would be borrowing over a trillion rupees from banks during the ongoing third fiscal quarter, Jan-march FY13. Secured in whatever form, the government’s budgetary borrowings have a heavy bearing on the country’s ailing economy that reflects in one way or the other.
Even the country’s stocks market, which is booming these days on the back of earnings announcement season, saw some investors concerned over the adverse affects of government borrowings.
“Rising local cement prices, higher textile sector exports, easing political uncertainty and renewed foreign interest played a catalyst’s role in the positive close in stocks at KSE ahead of major earning announcements due this week amid concerns for higher government borrowings,” said Ashen Mehanti, a senior equity analyst from Arif Habib Securities.
