KARACHI, April 27: The rate of monetary expansion has finally fallen within the target set for this fiscal year making it possible for the economic managers to face the second IMF review mission with their chins up. The mission is due early next month.
But sources close to SBP say the central bank still needs to keep its net domestic assets under check to keep the growth of money supply from rising.
According to the State Bank statistics, growth of money supply slowed to 9.42 per cent as on April 6 down from 10.67 per cent— the fastest growth recorded during this fiscal year as on March 16. The target set for fiscal July/June 2001/02 is 9.54 per cent.
The sources say the fall in the rate of money supply growth has brightened the chances for meeting this target but for that the central bank still needs to contain its net domestic assets.
They say the NDA stood at Rs25 billion on April 6 against the end-June target of Rs6.8 billion. This means that the State Bank will have to reduce the NDA by Rs18.2 billion within less than three months.
“That should not be a problem if the State Bank has the guts to keep the government borrowing within limits,” said a senior banker close to SBP.
“Besides, the SBP will have to keep the surplus liquidity from rising too fast.”
Net government borrowing for budgetary support stood at Rs2.2 billion as on April 6 up from minus Rs2.9 billion at end-March 2002. In other words the government borrowing has risen by Rs5.1 billion within a week.
“That is not a healthy trend,” says a source close to the SBP. The end-June target for government bank borrowing is minus Rs6.9 billion. The sources say the central bank is worried about the rising government bank borrowing because the end-March target set for it had slipped and the rising trend shows meeting the end-June target would also be difficult. The end-March target was minus Rs4 billion.
The fact that the government has collected only Rs276 billion revenue in the first nine months of this fiscal year leaves no doubt that it would miss the whole year target of Rs414 billion.
That makes it difficult for the government to contain its bank borrowing for budgetary support. That is why it is looking for ways to make up the shortfall in income and revenue more through non-bank sources rather than through bank borrowings in the last quarter.
Senior bankers say that since the inter-bank market is showing a rising trend in liquidity levels, the SBP will have to mop up part of excess liquidity to check growth of NDA and money supply.
They say what is of prime concern to them is the question whether the SBP will go for a slight tightening of its monetary policy while chasing the end-June IMF targets? The central bank stopped easing its monetary policy in mid-February and has kept the interest rates almost stable since then. But bankers say the stability in interest rates is just an indication that the rates have been bottomed out meaning that they will now move upwards.
It is against this backdrop that senior bankers are attaching too much importance to an inflow of Rs22 billion due in the inter-bank market on May 2. They say the auction of treasury bills that would be held the same day would set the tone of the SBP policy. Some bankers say the central bank may even hold an open market operation before that to suck in part of the surplus liquidity in the inter-bank market.