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Money Week

A distinct change in monetary policy stance

RECORDER REVIEW

The State Bank, which used to be more concerned with price stability, has made definitive moves in the past few weeks to ease the monetary policy in order to channelise more credit to the private sector and revive economic activity in the country. Repo-rate was reduced by a substantial margin of two percentage points from 13 percent to 11 percent with effect from January 5. During the week ended January 22, 2000, about Rs. 24 billion were injected in the money market at very low rate of interest. This would enhance the resource-base of the banking system and was contrary to the past practice of mopping up liquidity from the market.

Another major development during the week was the restoration of the powers of the authorised dealers (mainly banks) to remit foreign exchange in various forms without prior approval of the State Bank. The step was taken following the strength of the rupee in the free market and comfortable level of reserves and was expected to go a long way in restoring the confidence of foreign investors.

During the week ended January 22, 2000, money supply was provisionally estimated to have declined further by Rs. 4.0 billion to Rs. 1,305.5 billion as compared with the fall of Rs. 6.6 billion in the previous week. The fall emanated from the contractionary influence of the government sector. Component-wise, currency in circulation came down by Rs. 7.3 billion, which was neutralised to some extent by the rise of Rs. 3.3 billion in deposit money.

During the year so far, money supply was estimated to increase by only Rs. 23.5 billion or 1.83 percent.

Total assets/liabilities in the issue department of the State Bank came down by Rs. 7.8 billion to Rs. 370.7 billion. On the liabilities side, notes in circulation fell by Rs. 7.6 billion to Rs. 370.6 billion. On the assets side, government of Pakistan securities declined by Rs. 6.5 billion to Rs. 262.5 billion, while approved foreign exchange decreased by Rs. 1.3 billion to Rs. 62.5 billion. Gold coins and bullion, however, continued to remain unchanged at Rs. 27.7 billion.

In the banking department of the State Bank, total assets / liabilities went up by Rs. 8.4 billion to Rs. 531.7 billion. On the assets side, investment in government securities and balances held outside Pakistan in approved foreign exchange increased by Rs. 22.5 billion and Rs. 4.2 billion to Rs. 230.0 billion and Rs. 17.5 billion respectively. Items registering declines, on the other hand, included government treasury bills (- Rs. 13.4 billion), loans and advances to scheduled banks for agricultural sector (- Rs. 0.5 billion), and other assets (- Rs. 4.9 billion). On the liabilities side, deposits of banks, others and other liabilities rose by Rs. 5.4 billion, Rs. 1.8 billion and Rs. 4.3 billion to Rs. 89.2 billion, Rs. 263.4 billion and Rs. 109.0 billion respectively while deposits of Federal government and provincial governments came down by Rs. 1.4 billion and Rs. 0.5 billion to Rs. 5.2 billion and Rs. 6.9 billion during the week.

Total assets/liabilities of the scheduled banks decreased by Rs. 3.3 billion to Rs. 1685.0 billion. On the assets side, items recording declines included foreign currency held in Pakistan (- Rs. 0.4 billion), investment in treasury bills (- Rs. 10.7 billion) and other assets (- Rs. 0.9 billion). On the other hand, balances with State Bank, advances other than those to banks and investment in central government securities went up by Rs. 8.6 billion, Rs. 1.1 billion and Rs. 1.0 billion to Rs. 122.4 billion, Rs. 749.7 billion and Rs. 117.0 billion respectively.

Total demand and time liabilities of the scheduled banks rose by Rs. 1.1 billion to Rs. 1126.8 billion. Time deposits (general) went up by Rs. 3.8 billion to Rs. 617.3 billion while demand deposits (general) went up by a mere Rs. 0.1 billion to Rs. 446.1 billion. Borrowings from banks abroad also increased by Rs. 0.9 billion to Rs. 23.8 billion. On the other hand, other liabilities and capital (paid-up) and reserves declined by Rs. 2.1 billion and Rs. 0.6 billion to Rs. 270.9 billion and Rs. 80.5 billion respectively.

Bank credit to the private sector expanded marginally by Rs. 0.3 billion to Rs. 773.1 billion compared with the increase of Rs. 1.8 billion in the preceding week. Earning assets of the scheduled banks, however, registered a substantial fall of Rs. 8.5 billion to Rs. 1125.5 billion due to sharp decline in the holdings of treasury bills by the scheduled banks.

Liquid foreign exchange reserves of the country increased further by $ 56.0 million to $ 1,544.7 million as compared with the rise of $ 19.3 million in the preceding week. Free market rate showed only minor fluctuations and closed the week exactly at the previous week's end level of Rs. 53.95 and Rs. 54.00 to a dollar for buying and selling respectively. Inter-bank floating rate and authorised dealers' exchange rate (selling) for currency notes also continued to remain unchanged at Rs. 51.90 and Rs. 52.68 per US dollar throughout the week under review.

The inter-bank call rate also remained at last week's level of 10.95 percent per annum during the first three days of the week but eased considerably thereafter to close the week at 6.00 - 6.65 percent due to injection of substantial liquidity by the State Bank in the market. In the open market operations, Rs. 2.8 billion were offered but the State Bank did not accept any bids. Instead in the reverse repo it purchased treasury bills amounting to Rs. 24.0 billion; Rs. 4.8 billion for two weeks at 7.00 percent and Rs. 19.2 billion for one month at 6.75 percent.