The State Bank of Pakistan (SBP) has issued Monetary Policy Statement (MPS) for July-December,2004 on the 21st July, 2004. A few aspects of the MPS are analysed hereunder.

The credit expansion during July 2003-June 26,04 has been put at Rs301.2 billion compared with the growth of Rs152.2 billion during the corresponding period of the previous fiscal 2002-03 (FY 03).

The data of the sectoral credit growth given in the MPS is for 11 months only i.e. July 2003-May,04. The agriculture sector's share in the credit expansion has been put at 5.5 per cent or Rs15.74 billion.

However, as per the data provided in Table 2.5 of the SBP's 3rd quarterly report released in the end-June, 2004, the figure was put at Rs 3.392 billion only. The details are given in Table 1:

How the credit expansion in the agriculture sector could increase by Rs12.348 billion (Rs 15.74 billion-Rs3.392 billion) during the months of April-May,2004 is not comprehensible. During these two months, heavy credit off-takes do not seem possible.

The MPS puts the fiscal deficit during FY-04 at 3.9 per cent which is obviously a provisional figure. In the SBP's quarterly reports, the fiscal deficit was worked out, interalia, from out of bank borrowings, external receipts and the privatization proceeds (even though the government had pledged to use the privatization proceeds only for repayment of the debts and alleviation of poverty). For instance, please refer to Table 3.4 page 41 of the SBP second quarterly report for FY-04.

It has for the first time been revealed in the MPS that the government had borrowed a heavy sum of Rs122.5 billion from the SBP also. Obviously, the borrowing from SBP would go towards the budget deficit.

If the said borrowings from the SBP are taken into account, the fiscal deficit for FY04 shall far exceed the above provisional estimate and would be around 4.95 per cent as is worked out in Table 2.

The nominal GDP during FY 04 is put at Rs5458 billion by the current Economic Survey. Thus the fiscal deficit works out to 4.95 per cent This may still vary slightly on the higher side when the final figures of foreign loans disbursements become available in due course.

The above fiscal deficit is based on the GDP calculated after the base was changed from 1980-81 to 1999-2000. Sans this change, the fiscal deficit would have gone much higher -- near about 6 per cent.

FY 04 witnessed deteriorating situation in the external sector because trade deficit widened to a record level of $ 3.2 billion and the quantum of surplus balance of payments (July 2003-May 04) sharply came down by 70.7 per cent to $1.2 billion when compared to the same period of the previous fiscal FY 03.

It would be worthwhile to point here that in the MPS, the base for calculating the trade deficit has been changed. The trade deficit calculation has this time been based on the "customs figures".

The SBP had through-out in the past been using the data compiled by it from the monthly returns of the "actual receipts and payments" furnished by the banks. In fact, the data compiled by the SBP is more accurate and reliable as it depicts the actual receipts and payments while the customs' figures denote the shipments received in Pakistan and sent outside the country regardless of the fact whether payments have been duly received in respect of the export shipments or made in respect of import shipments.

This may have perhaps been done as SBP data for June,2004 would not be ready at the time of issuance of the MPS. However, the SBP data should continue to be used in order to depict the real picture.

Some times, different interpretations haunt different minds about the same issue. For instance, the SBP authorities feel that the liquidity position of the banks during FY 04 was not as comfortable as it was during the last couple of years, on account of (a) fast dwindling net capital inflows from overseas, (b) SBP injected Rs52 billion on account of purchases of dollar from the banks in FY 04 as against injection of Rs263 billion in FY 03 and (c) record lending to the private sector during FY 04.

In FY 03 SBP followed "sterilization" policy to suck back the liquidity which got injected into the banking sector against purchase of $. This was a two-pronged strategy. While the government sold low-priced Market Treasury Bills (TBs), it retired high priced TBs held by the SBP.

On page 111 of SBP's first quarterly report for FY 03, it has been mentioned that the government off-loaded the SBP TBs stock to the extent of Rs 366 billion during FY 02 and the first quarter of FY 03 out of which Rs 197 billion were adjusted towards special debt repayment account while the balance sum of Rs 169 billion related to the sterilization.

The SBP did not release the figures of the sterilization during subsequent quarters of FY 03 but it can be safely assumed that the balance sum of Rs94 billion (Rs263 billion-Rs169 billion) may also have been sucked back completely neutralizing the effect of the injection of Rs263 billion.

It is true that in FY 04, lending to the private sector expanded by Rs 301.2 billion but to finance these lendings, the banks mobilized deposits of the order of Rs 311.404 billion during FY 04 (as per SBP annual report for FY 03, banks' demand and time liabilities stood at Rs 1681.528 billion as at the close of that year while as per press release issued by the SBP these liabilities as on 27th June 2004 stood at Rs 1992.932 billion).

If we deduct 20 per cent on account of statutory reserve/ statutory liquidity Reserve required to be kept by the banks with the SBP, the net additional amount available to the banks for lending was Rs 249.13 billion and in addition to that a sum of Rs 52 billion was injected by the SBP on account of dollar purchases which remained with the banks as the SBP is believed not to have carried on sterilization operations during FY 04.

The banks' liquidity was thus not less comfortable in FY 04 when compared to the previous year(s). The banks' "comfort" has to be seen from yet another angle also. If the banks are sitting on the liquidity without having lending avenues, they will be in a much uncomfortable position. During FY 04, they were more comfortable as they did have the liquidity and also the lending opportunities.