MONEY WEEK: all eyes on CSF release due this month

Monday, 01 February 2010 11:30

Economic Updates - Pak Major Financial News

KARACHI : Easy come, easy go. After four straight weeks of positive flows in net foreign account, the week ending January 16 saw an outflow of Rs23 billion. Yet the inflow of Rs100 billion in the preceding four weeks, coupled with the cumulative reduction of Rs20 billion in currency-in-circulation despite the retirement of government s SBP loans, allowed private sector credit to increase by Rs46 billion by mid January.

The impact of this liquidity gave some breather to corporate borrowers as private sector credit jumped by Rs16 billion during the second week of January. But the overall picture of monetary aggregates of the week in question is not at all encouraging.

The biggest dampener is the fall in NFA, which coupled with a decline in government borrowing for fiscal support, despite some reduction in CIC and increase in credit to non-government sector, pushed demand and time liabilities lower by Rs25 billion. That explains the easing of money supply by Rs31 billion during the week.

While the decrease in government borrowing from commercial lenders is a good move to mitigate the crowding-out of private sector, its continuation is a big question. Therefore, the bottom line for all monetary evils is the delay in foreign flows from different channels.

The Finance Minister, Shaukat Tarin, says that Pakistan s friends have assured the IMF regarding their disbursement for budgetary support. But FoDP s recent investment moot in Dubai sends a wrong signal, and in fact, somewhat fuels the market speculation that Pakistan is not going to get anything from this forum.

A way out, in the absence of this not-so-friendly hope, means that Pakistan s economic future depends on bilateral inflows from the US and other countries. After having been delayed over and over again in the last nine months, a portion of US Coalition Support Fund is said to be released within a week or two. But then, such statements have been made from the government regularly in the last six months.

The recent fall in rupee s value in the open market is not only going to hurt foreign investment inflows in the second half, but will also threaten to soften the pace of stellar growth in home remittances, as expatriates may hold back a part of their savings in the coming months. In fact, remittances appear to have already started tapering off, as inflows dropped 9 percent month-on-month during December.

If this converts into a downhill trend, it might lead to a further fall in rupee, thereby creating a vicious cycle. In addition, the recent surge in sovereign insurance premium - called credit default swaps - after remaining stagnant for over seven months, may further dampen the foreign investment climate.

These developments warrant for an alternative policy to spur output - one that should be primarily based on revving up domestic engines. In this regard, however, mounting fiscal slippage remains a barrier in routing domestic savings to private investment.

In a recent presentation, Tarin said that an additional Rs310 billion is required to meet fiscal requirements, which includes unbudgeted subsidies and defence related expenditures.

This adjustment is mainly sought by lopping Rs150 billion off the PSDP. But even after the cut in development expenditure and some other accounts, a shortfall of Rs64 billion (0.4% of GDP) would balloon the fiscal deficit to 5.3 percent.

Keeping an eye on these developments and the reappearance of inflation threats, the central bank maintained a status quo in its latest policy review. Therefore, knowing that private sector s share in the monetary pie can only be increased if the cake gets bigger; this implies that inflows from the US coalition fund and other strategic disbursements are imperative.

And since we are seven months into the fiscal year, these inflows must come within the next three to four weeks to be able to spur credit supply to the ailing industrial sector in the remaining months. Unfortunately, however, the fate of economic recovery lies in foreign hands.