The State Bank of Pakistan (SBP) rightly making efforts to control the circulation of money (demand & supply) in the market by different monetary decisions and mechanisms in Pakistan as if the monetary policy decisions are effective then it can influence the economic growth and development of country. Recently the SBP has raised the interest rate by 50 basis points to 6.5 percent in May 2018.
However some leading businessmen and economists talking to this scribe foresee this rise in interest rate push the domestic exporters and industrialists for further competition against their rivals who enjoy leverage of low interest rate in their respective countries. It is also said that the increased interest rate would discourage financiers to participate in various mega projects in the future.
During the period July 1, 2017 to March 30, FY2018, the Ministry of Finance statistics explained that the currency in circulation (CIC) grew to Rs173.5 billion (4.4 percent) as compared to Rs151.1 billion (4.5 percent) in the comparable period of previous year, however, it recorded YoY growth of 17.2 percent as on 30th March, FY2018. The currency-to-M2 ratio grew to 26.6 percent as on 30th March, 2018 compared to 25.7 percent during the corresponding period of last year.
Economists revealed that monetary policy has far reaching impact on financing situation in the economy, not just the costs, but also the availability of credit, banks’ willingness to assume specific risks. They have also explicated that a monetary policy decision that cuts interest rate, for example, lowers the cost of borrowing, resulting in higher investment activity and the purchase of consumer durables. It is also said that low interest rates also tend to cause currency to depreciate because the demand for local goods increases when imported goods become more expensive.
Furthermore, during the period 01 July-30 March, FY2018 bank deposits stood to Rs597.1 billion as compared to Rs 604.9 billion (6.4 percent) in the corresponding period of previous year. Consequently, currency -to- deposit ratio grew to 36.3 as on March 30, 2018 as against to 34.6 in previous year. In contrast, statistics showed that the Resident Foreign Currency Deposits (RFCD) grew by Rs86.2 billion during 01 July-30 March, FY2018 compared with Rs14.8 billion during the corresponding period last year. During 01 July-30 March, FY2018 money supply (M2) observed an expansion of Rs770.9 billion (growth of 5.29 percent) as against to expansion of Rs756.1 billion (5.9 percent) in the corresponding period previous year. Net Foreign Assets (NFA) point contribution in broad money declined to 3.24 percent during 01 July-30 March, FY2018 against the contraction of 2.22 percent in the corresponding period of FY2017. Net Domestic Assets (NDA) point contribution in broad money grew to 8.53 percent during the period under review against expansion of 8.12 percent registered in the corresponding period of FY2017.
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However, the overall money supply (M2) growth stayed balanced during the period under review as against to the previous year. Similarly, reserve money contained at growth 5.6 percent during 01 July-30 March, FY2018 as against to the growth of 7.9 percent during the corresponding period of previous year.
The Finance Ministry statistics also showed that the growth in SBP’s NDA remained at 18.16 percent as against to 15.97 percent in the corresponding period of previous year whereas SBP’s NFA contracted by 55.7 percent as compared to the contraction of 24.8 percent during the corresponding period previous year. Consequently, reserve money growth remained subdued during the period under review as growth in SBP’s NDA was more than offset by a sharp contraction in NFA of SBP.
The Finance Ministry statistics also showed that within Broad Money, Net Foreign Assets (NFA) of the banking sector declined to Rs472.8 billion during 01 July-30 March, FY2018 as against to the contraction of Rs284.8 billion previous year. Within NFA, NFA of State Bank which was pessimistic as on end-June 2017, reduced more by Rs461.5 billion during the period as against to the fall of Rs155.2 billion in the previous year. Presently, in the economic survey of Pakistan, it is also mentioned that the NFA of scheduled banks fell by Rs11.2 billion as against to contraction of Rs129.7 billion during the corresponding period previous year.
NFA of SBP fell during the period under review because of high financing needs for current account deficit and foreign debt servicing payments in Pakistan.
Economic survey statistics also revealed that the NDA of the banking sector posted an expansion of Rs1,243.7 billion (8.9 percent) during 01 July-30 March, FY2018 as against to the expansion of Rs1,040.9 billion (8.8 percent) in the corresponding period previous year. Within NDA, NDA of SBP recorded expansion of Rs664.5 billion as against to expansion of Rs375.7 billion in corresponding period of previous year. The NDA of scheduled banks rose by Rs579.2 billion as against to Rs 665.2 billion during the corresponding period last year. During 01 July-30 March, FY2018 credit to public sector enterprises (PSEs) also grew by Rs174.0 billion as against to Rs169.9 billion in the corresponding period of FY2017. Furthermore, the monetary asset (M2) comprises of currency in circulation, demand deposits, time deposits and resident’s foreign currency deposits. During the period 01 July-30 March, FY2018 Money supply (M2) observed a growth of 5.29 percent as compared to the growth of 5.9 percent in the corresponding period of previous year. Whereas YoY basis it remained at 13.0 percent as on 30th March, FY 2018 in Pakistan.