KARACHI: Monetary expansion witnessed slight growth in the first five months of FY19, led by an unusually higher activity from private sector.

The State Bank of Pakistan’s (SBP) latest report, covering the period from July to November 23, reveals that monetary expansion (M2) grew 0.2 per cent or Rs31.2 billion, compared to a decrease of 0.58pc or Rs77bn) in corresponding same period last year.

Monetary expansion is an indicator of higher economic activity but is also positively correlated with inflationary pressure.

The government’s borrowing for budgetary support plunged by 65pc to Rs229bn versus Rs377.5bn in same period last year.

The situation emerged due to the government’s strategy to borrow from the Central Bank and retire debts of the commercial banks which resulted into higher liquidity of the banking system. This higher liquidity of banks requires investing in the private sector.

During the first five months of this fiscal year, private sector borrowing from the banking system soared by 247.6pc to Rs342bn, from Rs98.4bn in 5MFY18 — an increase of Rs243.6bn. However, private sector credit offtake in the remaining months of 2017-18 then hit a record high at Rs775.5bn, leaving the possibility that FY19 may witness another peak.

SBP’s recent monetary policy also warned of rising inflationary pressure due to growing demand for liquidity. Surprisingly, despite the interest rate increasing to 10pc from 6.5pc in just the last three bimonthly monetary policies, private sector’s borrowing has remained robust.

However, some bankers said the second half of FY19 could see a decline in private sector credit offtake since the cost of borrowing has become too high for investors.

In the last monetary policy, SBP stated that despite contractionary monetary conditions, increase in the working capital needs due to capacity additions in the last three years as well as recent surge in input prices were the main drivers of relatively higher credit flows to private sector.

The newly raised policy rates and other measures are likely to contain domestic demand during the current fiscal year, SBP added.

Dollar strengthens against rupee

The US dollar appreciated further against the rupee in the interbank and open markets on Wednesday as pressures on the foreign exchange reserves continue to fuel uncertainty in the currency market, said dealers.

The greenback gained 75 paisa against the rupee in the interbank market; the closing rate of the US dollar in the market was Rs138.75. However, during the session the US currency reached an intraday high of Rs139.

The open market also registered an increase of 60 paisa in the dollar rate which was sold at Rs138.60.

The dollar could shed some weight against the local currency as the country’s import bill is likely to ease with the decline in international oil prices.

The low oil prices along with Saudi package of $1 billion oil on deferred payments could help bring stability in the exchange rate. However, the currency market is suffering from a trust deficit among stakeholders.

Published in Dawn, December 6th, 2018