KARACHI, Jan 20: Money supply has grown by 9.4 per cent in the first half of this fiscal year against a full-year target of 10.8 per cent. Economists and bankers say chances are that it will exceed the target.

In that case the government may not be able to keep inflation within the target level of four per cent. In the first half of this fiscal year consumer inflation stood at 3.55 per cent. But to say whether higher monetary expansion would really fuel inflation is a bit too premature. Says economist Dr. Javed Akbar Ansari: “If higher monetary expansion gives a boost to real production only then we can see inflation rising...and that would not be bad. But if it does not happen then unemployed liquidity will be the outcome and that would not be good.”

Central bankers say indications are that real production will rise as according to them the large scale manufacturing that was on the decline in the first quarter is showing signs of recovery.

But they admit that there would be a time lag between the recent pickup in private sector credit demand and growth in large scale manufacturing.

Senior bankers say monetary expansion has risen sharply in the first half of this fiscal year primarily due to a huge buildup in net foreign assets on the back of dramatically high inflows of home remittances.

Up to December 28 NFA grew by Rs196 billion against the full fiscal year target of Rs91.5 billion as the country received more than two billion dollars in home remittances in six months to December 2002.

This dramatically high level of remittances which is more than double the level seen in a year-ago period has flooded the inter-bank market with liquidity. And banks have not been able to use surplus cash appropriately. They are now looking for new avenues.

“We have increased conventional lending and are also looking for new avenues to employ the liquidity gainfully,” said head of credit of a large local bank. Up to December 28 banks disbursed Rs68.7 billion credit to the private sector against the full-year target of Rs94.7 billion. Bankers say credit intake still goes on and the figure may further rise but many of them doubt it would touch the target level. The private sector makes seasonal borrowing mainly during October-March whereas April-September is regarded as credit retirement season. “So there is some scope for the private sector credit to rise further but I think the volume will not hit the target as the initial pickup in credit demand has already started slowing,” says treasurer of a major foreign bank.

On the other hand home remittances and even foreign direct investment (that has also risen by 164 per cent to $540 million in six months to December 2002) are likely to keep an upward march. This is likely to keep the net foreign assets and consequently monetary expansion on the rise.