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MONEY WEEK

Govt increases borrowings from the State Bank

RECORDER REVIEW

During the week ended March 11, 2000, government increased its borrowings from the State Bank. At the same time, it reduced its dependence on the scheduled banks. In fact, this pattern has emerged during the last few weeks and is manifested in higher level of investment in government securities in the balance sheet of the State Bank and a reduction in the holdings of treasury bills by the scheduled banks. Such a shift has been caused by a desire of an easy monetary policy by the State Bank which is seeking to lower the interest rate structure in the economy and expand credit in the private sector. Also, during the last few weeks, the State Bank is either not picking up liquidity from the market through its open market operations or selling the MTBs only in nominal amounts at very depressed rates. The State Bank could afford to indulge in such an exercise because Pakistan is not committed to an understanding with the IMF at present and, therefore, not bound to maintain the Net Domestic Assets within a specified ceiling.

During the week ended 11th March, 2000, money supply was provisionally estimated to have increased by Rs. 2.1 billion to Rs. 1322.2 billion (last week's figures revised). The expansionary impact emanated from government sector. Private sector, on the other hand, was contractionary during the week. Component-wise, currency in circulation rose by Rs. 6.5 billion which was largely offset by a drop of Rs. 4.4 billion in deposit money.

During the year so far, money supply is estimated to have gone up by Rs. 40.2 billion or 3.14 percent.

Total assets / liabilities in the issue department of the State Bank went up by Rs. 6.3 billion to Rs. 365.1 billion. Notes in circulation, on the liabilities side, increased by an equal amount to Rs. 365.0 billion. On the assets side, Government of Pakistan securities and approved foreign exchange rose by Rs. 4.7 billion and Rs. 1.6 billion to Rs. 254.6 billion and Rs. 64.8 billion respectively.

In the banking department of the State Bank, total assets / liabilities also increased by Rs. 4.2 billion to Rs. 546.7 billion. On the assets side, other assets and loans and advances to scheduled banks for export sector went up by Rs. 4.6 billion and Rs. 0.4 billion to Rs. 34.1 billion and Rs. 84.1 billion respectively. On the other hand, investment in government securities was the only item recording a decline of Rs. 0.9 billion to Rs. 256.2 billion. On the liabilities side, items registering increases were deposits of federal government (+ Rs. 1.5 billion), banks (+ Rs. 3.2 billion) and others (+ Rs. 0.2 billion) and other liabilities (+ Rs. 3.0 billion). Deposits of provincial governments, however, came down by Rs. 3.6 billion to Rs. 9.8 billion during the week.

Total assets / liabilities of the scheduled banks decreased by Rs. 2.1 billion to Rs. 1695.5 billion. On the assets side, items recording declines included foreign currency balances with banks abroad (- Rs. 0.5 billion), advances other than those to banks (- Rs. 3.3 billion), investment in treasury bills (- Rs. 3.7 billion) and other assets (- Rs. 2.6 billion). Balances with State Bank and other investments, on the other hand, went up by Rs. 4.2 billion and Rs. 0.2 billion to Rs. 128.9 billion and Rs. 41.2 billion respectively.

Total demand and time liabilities of the scheduled banks came down by Rs. 4.5 billion to Rs. 1137.5 billion. Time deposits (general) and demand deposits (general) fell by Rs. 3.5 billion and Rs. 0.9 billion to Rs. 625.6 billion and Rs. 448.5 billion respectively. Other liabilities also declined by Rs. 0.4 billion to Rs. 275.3 billion. On the other hand, borrowings from State Bank rose marginally by Rs. 0.2 billion to Rs. 144.4 billion.

Bank credit to the private sector fell by Rs. 3.1 billion to Rs. 764.5 billion as compared with the contraction of Rs. 0.6 billion in the preceding week. Earning assets of the scheduled banks registered a larger fall of Rs. 6.7 billion to Rs. 1119.1 billion due to substantial reduction in the holdings of treasury bills.

Liquid foreign exchange reserves of the country went up by $30.9 million to $1558.2 million as against the decline of $7.7 million in the previous week. Free market rate of the rupee improved further from Rs. 54.22 and Rs. 54.25 to a dollar for buying and selling respectively at the end of last week to Rs. 54.15 and Rs. 54.18 by March 11, 2000. Inter-bank floating rate (selling) and authorised dealers' exchange rate (selling) for currency notes, however, continued to remain unchanged at Rs. 51.89 and Rs. 52.68 per dollar throughout the week.

Conditions in the money market turned easy due to the sale of only Rs. 76 million worth of treasury bills by the State Bank in the open market operations at a cut-off rate of 7.89 percent for 12 months. The State Bank had set a pre-auction target of Rs. 11.99 billion for selling T-bills against which offers amounting to Rs. 8.5 billion were received. As most of the bids were rejected, the call rate dropped from 7.40 - 7.75 percent at the close of last week to 2.50 - 3.00 percent by 11th March.