KARACHI, March 30: Money supply has risen beyond target mainly due to higher inflow of foreign exchange into the country but its inflationary impact may remain subdued as the economy is not over-heated.
The State Bank statistics put monetary expansion upto March 9 at 10.57 per cent against the full year target of 9.54 per cent to be achieved by June 30, 2002.
In absolute terms money supply has gone up by Rs161.4 billion against the annual target of Rs145.6 billion. But the reason why the central bank does not seem bothered about it is that monetary expansion is not among the performance criteria tagged with a $1.3 billion IMF-supported poverty reduction and growth facility for Pakistan.
“Besides, higher monetary expansion may not fuel inflation as the economy is not over-heated,” says a source close to the SBP. Pakistan’s gross domestic product grew by only 2.6 per cent in fiscal 2000-01 and this year it is expected to grow by 3.3-3.5 per cent. A higher economic growth might have bothered the central bankers about the possible inflationary impact of faster monetary expansion.
The SBP analysis shows that monetary expansion has burst the target mainly due to higher inflow of foreign exchange that has raised the net foreign assets (NFA) by Rs98 billion upto March 9 against the full-year target of Rs75.4 billion. Pakistan got a cool $1.4 billion only through home remittances during the first eight months of this fiscal year against $788 million received a year ago.
Some bankers say the State Bank could have kept the monetary expansion within the limit had it mopped up excess liquidity from the market more aggressively than it did. But sources close to SBP say that would have further contracted the private sector credit.
The fact that credit flow to the private sector has remained much below the target upto March 9 is one of the reasons why a higher monetary expansion is not going to be as inflationary as one could have feared. Consumer inflation (or inflation measured by consumer price index) rose by 2.83 per cent in the first eight months of this fiscal year against the full year target of five per cent.
Net credit to the private sector expanded by Rs39.6 billion upto March 9 against the full-year target of Rs98.1 billion.
Sources close to the IMF say the Fund has revised the full-year targets for the current fiscal year that may be made public early next month.
On March 27 the IMF board of directors cleared way for the release of $107 million second tranche of the $1.3 billion PRGF but the amount is yet to be credited into the SBP’s account.
The first review of Pakistan’s economy on the basis of which the IMF has approved the release of the second tranche does not only revise broad targets of economic growth and budget deficit but also other performance criteria and indicative targets as well.
The sources say NDA (Net domestic assets) and NFA being performance targets and monetary expansion being an indicative target also stand revised but they do not disclose the revised figures.