January 22, 2006	Sunday	Zilhaj 21, 1426

KARACHI, Jan 21: The State Bank of Pakistan has envisaged that the monetary expansion during the current fiscal year (FY06) should be moderate and close to the credit plan target of Rs380 billion, or 12.8 per cent, despite a sizable expansion in bank credit to the private sector.

This is being felt to be in line with tight monetary stance taken in the monetary policy announced in July 2005, under which broad money expansion was projected to decelerate from the preceding year (19.3 per cent in FY05 and l9.6 per cent in FY04) to 12.8 per cent (Rs380 billion) in FY06.

The monetary policy was tightened in order to contain inflation and absorb monetary overhang. Therefore, monetary expansion was kept lower than nominal GDP growth of 15 per cent consistent with the real GDP growth target of seven per cent and inflation target of eight per cent set for FY06.

The State Bank has called a mid-term meeting of the National Credit Consultative Committee (NCCC) on Monday afternoon (Jan 23) to review and approve monetary and credit policy for the remaining half of the current fiscal year. The Agricultural Credit Advisory Committee (ACAC) will meet in the morning of the same day. Top bankers, senior bureaucrats of the federal and provincial governments and representatives of trade and industry and farmer leaders will attend.

The expected monetary expansion is viewed in the light of a moderate rise in net domestic assets (NDA) of the banking system resulting from improvement in government’s budgetary position in the remaining part of the year.

According to working paper prepared by the SPB for the NCCC meeting, the bank credit to the private sector was likely to exceed the credit plan target of Rs330 billion mainly due to growing seasonal demand in the remaining months of FY06. However, credit to the government for budgetary operations is expected to remain under or to be close to the credit plan target of Rs98 billion due to expected inflows of privatization proceeds and realization of international financial commitments for earthquake relief operations.

The SBP feels that credit to the government to finance commodity operations for the procurement of essential food and other items is also going to pick up in the remaining months of the current fiscal.

The net foreign assets (NFA) of the banking system, however, are expected to show a moderate growth of 2.3 per cent (Rs15 billion) in view of an expected deceleration in net foreign inflows.

The central bank feels that the overall monetary expansion would not be impacted significantly due to realization of the expected inflows of privatization proceeds, for example PTCL, because the resulting rise in NFA would be offset to the extent of fall in NDA constrained by actual government spending on earthquake relief operations.

However, the SBP strongly advocates that cumulative impact of these developments on monetary expansion are expected to be moderate primarily on account of expected improvement in the fiscal position of the government.

During the first half of the current fiscal year (July-Dec 2005), monetary growth stood at 7.9 per cent (Rs236 billion) compared with the credit plan target of 12.8 per cent (Rs380 billion) and actual growth of 9.8pc (Rs244 billion) in the same period last year.

The stock of reserve money showed a relatively moderate expansion of 8.4 per cent (Rs76 billion) compared with the huge expansion of 15.9 per cent (Rs123 billion) in the corresponding period last year.

The SBP working paper discloses further that reserve money expanded due to higher government budgetary borrowings of Rs142 billion from the SBP during the July-December 2005 period, despite a substantial fall of Rs33 billion in NFA of the bank.

The NDA of the banking system contributed considerably to overall monetary growth and increased by Rs301 billion during July-Dec 2005, compared with an upsurge of Rs241 billion in the corresponding period last year. The enormity of private sector credit off-take (Rs297.6 billion) and sizable government borrowings for budgetary support (Rs78 billion) were the two key factors responsible for the current hefty build-up of NDA of the banking system, admits the SBP.

Other items (net) and government borrowings for commodity operations, however, partially contained expansionary trends in NDA by Rs55 billion, and Rs15 billion, respectively, says the SBP working paper.

Contrary to the credit plan projections of Rs15 billion expansion, NFA of the banking system showed a massive contraction of Rs64.6 billion and acted as sterilizing factor in overall monetary expansion.

The deceleration in NFA of the banking system occurred mainly on account of continuously expanding trade deficit of $3.3 billion (exchange based), hefty oil import bill ($2.6bn) and repayments for Euro bonds ($0.16bn) during July-November 2005.

In the last two years, the number of locally-assembled automobiles from the imported kits increased substantially on the roads, the sale of imported electronics went sky high, the construction of shopping malls and plazas picked up, but the inflation touched double digit and prices of wheat, sugar, pulses, vegetables, fruits, medicines, all other essential items, house rent and transport fares touched new heights to go beyond the reach of poor people in the cities and villages.

The private sector credit during July to December 2005 went up by 17.4 per cent to Rs197.6 billion in which the textile manufacturing sector has claimed the lion’s share of Rs59 billion, cement Rs8.4 billion, fertilizer Rs1.7 billion and leather Rs1 billion.

Banks gave Rs38.7 billion consumer loans in which the largest share of Rs13 billion went to automobiles, Rs12 billion to personal loans, mortgage finance Rs6 billion and Rs600 million for consumer durables.

A significant feature of half yearly bank credit is the absorption of Rs30.9 billion loans by the SME sector. The commerce and trade sector claimed Rs14.8 billion, or 48 per cent, while 47.5 per cent amounting to Rs14.7 billion was given to manufacturing. The services sector obtained Rs1.3 billion and Rs1 billion was given to ship-breaking.

The disbursement of bank credit to agriculture went up by 27.8 per cent to Rs44 billion most of which (80.4 per cent) amounting to Rs35.7 billion were production loan. The five big commercial banks offered Rs30.8 billion in five months, while Zarai Taraqiati Bank gave Rs12 billion.

For the next half of the fiscal year 2005-06, the government has pinned hopes on realization privatization proceeds and commitments of international donors for the relief and rehabilitation of earthquake affected areas. The government planners expect a reversal in the contraction process of foreign assets witnessed in the first half and there is likely to be improvement in government’s fiscal policy.

The current year’s credit plan was reviewed by the fiscal and monetary review committee with Prime Minister Shaukat Aziz in chair.