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MONEY WEEK

Bank credit on the decline

RECORDER REVIEW

Bank credit to the private sector, in sharp contrast to the normal trend, has fallen significantly during the current financial year. It peaked at around Rs. 773 billion in the last fortnight of January, 2000 but has been contracting continuously since then and stood at Rs. 759.8 billion on 25th March, the latest week for which the figures are available. This indicated a fall of more than Rs. 13 billion as against the increase of about Rs. 3 billion in the corresponding period last year. This is both a symptom and cause of sluggish economic activity in the country. Though the State Bank has taken a number of measures including reduction in the discount rate and rejection of bids for the sale of treasury bills in order to expand credit in the private sector, these have obviously failed to bear the intended effect due largely to the lack of interest by the business community and a relentless campaign launched by the government against the defaulters.

During the week ended 25th March, 2000, money supply was provisionally estimated to have fallen by Rs. 0.9 billion to Rs. 1314.3 billion. The contractionary impact seems to have emanated largely from the government sector. Component-wise, currency in circulation declined by Rs. 5.2 billion while deposit money went up by Rs. 4.3 billion.

During the year so far, money supply was estimated to have gone up by Rs. 32.3 billion or 2.52 percent.

Total assets/liabilities in the issue department of the State Bank came down by Rs. 3.7 billion to Rs. 368.4 billion. Notes in circulation, on the liabilities side, also declined by the same magnitude to Rs. 368.2 billion. On the assets side, government of Pakistan securities and approved foreign exchange declined by Rs. 2.8 billion and Rs. 0.7 billion to Rs. 259.2 billion and Rs. 63.5 billion respectively. Gold coins and bullion, however, continued to remain unchanged at Rs. 27.7 billion.

In the banking department of the State Bank, total assets/liabilities went up by Rs. 6.4 billion to Rs. 541.4 billion. Items recording increases on the assets side were government treasury bills (+ Rs. 0.5 billion), balances held outside Pakistan in approved foreign exchange (+ Rs. 1.7 billion), investment in government securities (+ Rs. 1.6 billion) and other assets (+ Rs. 2.9 billion). On the other hand, government debtor balances and loans and advances to scheduled banks for export sector came down by Rs. 0.9 billion and Rs. 0.8 billion to Rs. 4.5 billion and Rs. 82.7 billion respectively. On the liabilities side, items registering increases were deposits to Federal government (+ Rs. 0.5 billion), banks (+ Rs. 1.6 billion) and others (+ Rs. 3.2 billion) and other assets (+ Rs. 2.1 billion). Deposits of provincial governments, however, came down by Rs. 0.9 billion to Rs. 6.9 billion.

Total assets/liabilities of the scheduled banks rose by Rs. 5.1 billion to Rs. 1693.6 billion. Items recording increases on the assets side included cash in tills (+ Rs. 1.5 billion), balances with State Bank (+ Rs. 3.3 billion), foreign currency balances with banks abroad (+ Rs. 2.2 billion) and other assets (+ Rs. 0.4 billion). On the other hand, advances other than those to banks, and investment in central government securities and treasury bills came down by Rs. 1.2 billion, Rs. 0.8 billion and Rs. 1.3 billion to Rs. 736.0 billion, Rs. 116.2 billion and Rs. 123.9 billion respectively.

Total demand and time liabilities of scheduled banks went up by Rs. 4.1 billion to Rs. 1129.3 billion. Demand deposits (general) increased by Rs. 4.5 billion to Rs. 447.2 billion while time deposits inched up marginally by Rs. 0.1 billion to Rs. 619.1 billion. Other liabilities also rose by Rs. 2.0 billion to Rs. 278.5 billion. Borrowings from State Bank and capital (paid up) and reserves, however, came down by Rs. 0.6 billion and Rs. 0.7 billion to Rs. 143.2 billion and Rs. 81.5 billion respectively.

Bank credit to the private sector including for commodity operations and autonomous bodies contracted further by Rs. 0.3 billion to Rs. 759.8 billion compared to the fall of Rs. 4.4 billion in the preceding week. Earning assets of the scheduled banks depicted a larger decline of Rs. 4.6 billion due to unloading of government paper by the scheduled banks.

Liquid foreign exchange reserves of the country increased by $ 19.3 million to $ 1575.6 million as against the decline of $ 1.9 million in the last week. It may be mentioned that these reserves have been hovering around this level due to a carefully crafted policy by the State Bank to buy and sell foreign exchange in the market at the appropriate time. Free market rate of the rupee deteriorated due mainly to the strengthening of the dollar in the international market. The rate which was quoted at Rs. 54.10 and Rs. 54.13 per dollar for buying and selling respectively at the close of the previous week worsened by paisas 6 to Rs. 54.16 and Rs. 54.19 on 25th March, 2000. Inter-bank floating rate and authorised dealers' exchange rate (selling) for currency notes, however, continued to remain unchanged at last week's end level of Rs. 51.90 and Rs. 52.68 per dollar respectively.

Conditions in the money market tightened further. The call rate which was quoted at 6.00 - 6.45 percent per annum at the end of previous week rose to little under 10 percent by 25th March. Bids amounting to Rs. 12.70 billion were received for the purchase of MTBs but the State Bank accepted only Rs. 0.90 billion; Rs. 0.30 billion for 3 months at a cut-off yield of 7.29 percent, Rs. 0.50 billion for 6 months at a cut-off yield of 7.44 percent and Rs. 0.10 billion for 12 months at a cut-off yield of 7.89 percent.