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Money Week

Provincial governments roll in riches

RECORDER REVIEW

Provincial governments always seem to complain of shortage of funds but during the week ended 8th January, 2000, their deposits with the State Bank which usually hover around Rs. 2.0 billion increased to probably a record level of Rs 9.9 billion as compared to Rs. 1.7 billion a week earlier. This indicated an increase of 482 percent in a single week. On the other hand, government debtor balances, representing their overdraft position with the State Bank, also improved from Rs. 7.2 billion to 4.5 billion. The improvement in their financial position seems to be attributable to substantial borrowings of the Federal government from the banking system and a major shift of funds from the centre to the provinces. However, it may be mentioned that position of various provincial governments is not made known separately by the State Bank in its balance sheet.

During the week ended 8th January, 2000, money supply was provisionally estimated to have declined by Rs. 4.7 billion to Rs. 1317.8 billion as against the increase of Rs. 18.9 billion in the previous week. The fall was attributable mainly to the contractionary impact of the private sector. Component-wise, deposit money came down by Rs. 20.8 billion while currency in circulation rose by Rs. 16.1 billion.

During the year so far, money supply is estimated to have gone up by Rs. 35.8 billion or 2.79 percent.

Total assets / liabilities of the issue department of the State Bank increased sharply by Rs. 13.0 billion to Rs. 374.9 billion. Notes in circulation, on the liabilities side, shot up by Rs. 13.2 billion to a record level of Rs. 374.8 billion. On the assets side, government of Pakistan securities also jumped by Rs. 14.3 billion to Rs. 266.2 billion. However, approved foreign exchange decreased by Rs. 1.3 billion to Rs. 63.0 billion.

In the banking department of the State Bank, total assets / liabilities also rose by Rs. 2.7 billion to Rs. 527.4 billion. On the assets side, balances held outside Pakistan in approved foreign exchange and investment in government securities went up by Rs. 1.2 billion and Rs. 9.3 billion to Rs. 19.1 billion and Rs. 226.9 billion respectively. Items recording declines, on the other hand, included government treasury bills (- Rs. 5.0 billion), government debtor balances (- Rs. 2.7 billion) and other assets (- Rs. 0.2 billion). On the liabilities side, items registering increases were deposits of federal government (+ Rs. 0.4 billion), provincial governments (+ Rs. 8.2 billion) and others (+ Rs. 0.9 billion) and other liabilities (+ Rs. 3.8 billion). Deposits of banks, however, came down sharply by Rs. 10.7 billion to Rs. 88.3 billion.

Total assets / liabilities of the scheduled banks declined sharply by Rs. 71.6 billion to Rs. 1706.4 billion. Item wise analysis, particularly the behaviour of other assets and other liabilities during the week, indicate a big adjustment after heavy window-dressing at the end of 1999. On the assets side, other assets, balances with State Bank and investment in treasury bills declined by Rs. 65.6 billion, Rs. 5.8 billion and Rs. 2.0 billion to Rs. 231.9 billion, Rs. 117.6 billion, and Rs. 140.8 billion respectively. Cash in tills also came down by Rs. 2.9 billion to Rs. 19.2 billion. Items recording increases, on the other hand, included foreign currency balances with banks abroad (+ Rs. 1.1 billion), investment in central government securities (+ Rs. 1.2 billion), and other investment (+ Rs. 0.5 billion).

Total demand and time liabilities of the scheduled banks declined steeply by Rs. 21.5 billion to Rs. 1137.5 billion. Demand deposits (general) came down sharply by Rs. 14.2 billion to Rs. 445.1 billion while time deposits (general) also fell by Rs. 4.3 billion to Rs. 622.5 billion. Other liabilities recorded a huge decline of Rs. 59.5 billion to Rs. 280.4 billion. Borrowings from banks abroad, however, rose by Rs. 1.9 billion to Rs 23.4 billion.

Bank credit to the private sector came down marginally by Rs. 0.2 billion to Rs. 771.0 billion as against a sharp expansion of Rs. 21.4 billion in the previous week. Earning assets of the scheduled banks also fell by the same magnitude to Rs. 1139.2 billion in contrast to the rise of Rs. 12.5 billion in the preceding week.

Liquid foreign exchange reserves of the country rose marginally by $ 1.9 million to $ 1469.4 million in sharp contrast to the fall of $ 35.5 million in the preceding week. Free market exchange of the rupee improved by paisas 10 during the first two days of the week but deteriorated to last week's end level of Rs. 53.85 and Rs. 53.90 per dollar for buying and selling respectively by 7th January. Inter-bank floating rate and authorised dealers' exchange rate (selling) for currency notes, however, continued to remain unchanged at Rs. 51.90 and Rs. 52.68 throughout the week.

Conditions in the money market eased during the week. In the open market operations, the State Bank injected a substantial amount of Rs. 11.6 billion in the market. Rs. 2.7 billion for two weeks at a cut-off yield of 7 percent and Rs. 9.0 billion for one month at a cut-off yield of only 6.75 percent. The drastic reduction in the T-bills rate was a clear signal to the banks that they can no more rely on government paper for their profitability. Instead, they have now to channelise their resources to trade, industry and other avenues in the private sector. As a consequence, the call rate which was quoted at around 12 percent in the beginning of the week dropped to 5.50 - 6.65 percent on 7th January, 2000.