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KARACHI, Dec 7: The State Bank says that it has moved towards a proactive monetary management and has signalled to the market that it can defend the rupee without necessarily resorting to a change in its monetary stance.
But the SBP frankly admits in its first quarterly report that since the rupee has so far not come under significant pressure the effectiveness of the new approach is yet to be tested. The report says that the SBP has achieved a degree of market calm and the prospects for the future look promising after two per cent cut in discount rate in July-August.
“However, the events of September 11 have created an uncertain external environment in which monetary management has to be conducted.”
1ST QUARTER REVIEW: In the first quarter of this fiscal year private sector credit offtake remained at minus Rs23.5 billion whereas net government borrowing for budgetary support stood at Rs24.6 billion. While explaining this the SBP report says that normally fresh lending to private sector remains low while repayments from the past year continue in the first quarter of each fiscal year. It points out that economic activity kicks off with cotton and sugar financing that usually starts in October.
The report says that in addition to the seasonal slump in private sector lending the demand for credit was also lower in the first quarter of this fiscal year — especially in September. This was due to (i) late arrival of cotton to ginneries (ii) late crushing of sugarcane (iii) de-listing of cotton fabric and yarn from the list of items eligible for export finance (iv) cancellation or suspension of export orders after September 11; and (v) anecdotal evidence that the private sector is resorting to self- finance.
The SBP report says it is still too early to evaluate how the private sector will behave in the coming months. “Already, import figures and gross credit disbursement to allied sectors have shown some improvement...which suggests that the private sector is taking advantage of the rupee appreciation to gear up for future production.”
Despite the availability of Rs11 billion worth of banking sector adjustment loan from Japan and Rs5 billion SBP profit transferred to public exchequer, the net government borrowing between July-September 2001 stood at Rs24.6 billion. In the year-ago period, the net government borrowing for budgetary support was Rs36 billion. But at that time the government was unable to secure financing from non-bank and external resources and had to rely totally on the banking sector. This year the situation was different and the government had better access to non-bank financing — thanks to growing awareness about and popularity of Pakistan Investment Bonds. That is evident from the fact that as compared to only Rs3.3 billion borrowed through non-bank sources in July-September 2000, the government borrowed Rs31.1 billion in July-September 2001.
DISCOUNTING: During the first quarter of this fiscal year, banks discounted Rs161.5bn against Rs138.7bn in the same period of last fiscal year. But an interesting point here is that although banks visited the SBP discount window more frequently than last year, the average discounted per visit was much lower. “This shows that although banks were short of liquidity more often, they required less support from SBP,” says the report.
“The fact that this was done with cheaper support from the central bank (i.e. at reduced discount rate) suggests that cash management by the banks has improved.”
