KARACHI, July 3: The State Bank of Pakistan is expected to continue with tight monetary policy during this fiscal year with a money expansion projection at 13.5pc which would be supportive to real GDP growth target of 7pc and inflation target of 6.5pc.

The projected monetary expansion is expected to emanate mainly from accumulation in Net Domestic Assets (NDA) of the banking system due to the persistence of strong demand for credit by the private sector which is expected to be around Rs370bn against the annual credit plan target of Rs330 billion for FY06.

However, the SBP anticipated that Net Foreign Assets (NFA) of the banking system may accumulate moderately despite the expectation of large trade deficit in FY07, discloses the working paper to be reviewed at the annual meeting of National Credit Consultative Committee (NCCC) being held here on Tuesday.

The meeting will also review the monetary and credit development of FY06. Monetary expansion that had averaged at around 18pc in the last four years came down considerably to 13.33pc towards the end of FY06. The central bank continued to exercise tight monetary policy through frequent interventions in the inter-bank money market to delimit the supply of loan-able funds to contain inflation.

However, full-year broad money growth in FY06 is expected to be around 14.8pc compared with 19.3pc growth experienced in FY05. Correspondingly, Reserve Money (RM) expanded by 12.60pc (Rs114.49bn) during July-June FY06 compared with expansion of 19.36 per cent (Rs149.65 billion) in the same period of last year.

As projected in the credit plan, monetary expansion primarily occurred on account of buildup of NDA of the banking system which expanded by Rs373.12bn during July 10 to June FY06.

The credit to government for budgetary purposes continued to rise during FY06, until the receipt of funds on account of both privatisation of PTCL ($1.12bn) and issuance of foreign bonds ($0.8bn) between March 31 and April 13, 2006. The net credit to government for budgetary purposes peaked at Rs162.2bn during July 11, 2005 to March 2006 (credit to government from SBP had also peaked at Rs168.2bn during the same period) quickly came down to the lowest level of Rs43.3bn during July 22 to April 2006. Since then it had been rising and during July 10 to June FY06 it expanded by Rs120.41 billion.

In the absence of privatisation and bond receipts the government borrowing for budgetary support would have been around Rs235bn as on June 10, 2006.

Credit to government for commodity operations continued to show net retirement up to the third quarter; total retirements amounted to Rs33.04bn. However, the government borrowings picked up strongly in the fourth quarter and showed a massive expansion of Rs44.46bn.

The enormity of bank credit consumption by the private sector had started to unfold in FY03 continued through FY06. Bank credit to the private sector during July 10 to June FY06 grew by 19.49 per cent against the three year average annual credit growth of 29.7 per cent, the NCCC working paper says.

The recent trend of credit to private sector indicates that credit absorption by the private sector by the end of the year may be around Rs370bn against the annual credit plan target of Rs330bn. The manufacturing sector continued to dominate the consumption of bank credit as its credit consumption grew by 17pc (Rs128.9bn) against its consumption growth of 20pc (Rs146.8bn) in the corresponding period of last year.

The deceleration in credit consumption by the manufacturing sector primarily resulted from a significant decline in credit consumption by the textile industry to Rs68.8bn from Rs94.7 billion in the corresponding period of last year.

The paper says that consumer loans continued to register strong growth as they showed an expansion of 29.4pc (Rs73.3bn) during July-April FY06. The consumer loans comprised of auto loans (Rs25.8bn), personal loans (Rs22bn), loans via credit cards (Rs11.7bn) and loans for house building (Rs11.1bn).

Credit for Small and Medium Enterprises (SME) sector appreciated in recent years because of its ability to create employment opportunities. Credit from scheduled banks and DFIs to SMEs expanded by 13.3pc (Rs42.2bn) daringly July-April FY06 compared with an expansion of 25.6pc (Rs62.6bn) in the same period of last year.

However, the working paper of NCCC admitted that credit to SMEs remained concentrated towards commerce and trade sector and its credit absorption amounted to Rs23.5bn during July-April FY06, compared with the absorption of Rs32.6 billion the corresponding period of last year.