Qudsia Bano

In a notable economic development, the broad money (M2) growth in Pakistan witnessed a deceleration to 13.7% year-on-year as of November 24, 2023, marking a decline from 14.2% recorded at the end of June. The deceleration is primarily attributed to the net retirements in private sector credit and a more than seasonal decline in commodity operations financing, according to recent data. Reserve money, tracking a similar trajectory, also experienced a slowdown from June, largely influenced by a significant deceleration in currency in circulation. The deceleration in both broad money and reserve money signifies a shift in the economic landscape, shaped by various factors influencing the financial sector. One key factor contributing to the deceleration is the net retirements observed in private sector credit. The reduction in credit activity within the private sector has played a role in shaping the overall monetary landscape. Additionally, a decline in commodity operations financing, more than what is typically observed seasonally, has further influenced the deceleration in broad money growth. The data also reveals a contraction in net domestic assets since June, further contributing to the broader slowdown.

On the flip side, the net foreign assets of the State Bank of Pakistan (SBP) and the overall banking system experienced expansion since June, driven by considerable foreign exchange (FX) inflows in July. This shift in the composition of assets has contributed to the nuanced dynamics of broad money and reserve money. While the deceleration in broad money growth may raise questions about economic activity, experts highlighted that it could also be a result of strategic adjustments in the financial sector. The decline in currency in circulation and the careful management of private sector credit retirements suggest a measured approach by financial authorities. Talking to WealthPK, Shahid Javed, a senior economist at SBP, said that the key driver behind this deceleration was the notable net retirements observed in private sector credit. “This strategic reduction in credit activity within the private sector suggests a nuanced approach by financial authorities, possibly aimed at recalibrating the balance of credit and fostering a more controlled lending environment. Such measured adjustments play a crucial role in maintaining financial stability and preventing potential overheating in certain sectors.”

He said that another contributing factor to the deceleration was the more than seasonal decline in commodity operations financing. “This deviation from the expected trend underscores the influence of specific economic conditions on monetary movements. The combination of reduced private sector credit and the atypical decline in commodity operations financing speaks to the complexity of managing monetary policy in a dynamic economic environment.” The SBP economist suggested that the improved compositional mix of broad money and reserve money indicates a more stable and balanced financial landscape. “The expansion in net foreign assets is seen as a positive outcome, reflecting increased foreign exchange reserves and potential stability in the foreign exchange market.” “As Pakistan navigates through these changes, attention will be focused on how policymakers respond to ensure a balanced and resilient financial sector that supports sustainable economic growth. The nuanced interplay of factors influencing broad money and reserve money highlights the importance of a comprehensive understanding of the economic landscape for effective policymaking,” he noted.

Credit: INP-WealthPk