The growth of broad money in the first half of the last fiscal year 2022-23 (1HFY23) showed a significant slowdown compared to the same period of FY22. The broad money growth during this period slowed to a mere 1.2%, in stark contrast to the 4.3% growth witnessed during 1HFY22. This significant deceleration in the expansion of the money supply has raised concerns among economists and financial experts. The primary factor contributing to this slowdown is the remarkable growth in the Net Domestic Assets (NDA) of the banking system, which saw an impressive increase of Rs1.4 trillion during 1HFY23. This expansion in NDA was mostly driven by higher government budgetary borrowing from the banking system. As the fiscal deficit loomed large and external financing remained insufficient in 1HFY23, net budgetary borrowings from the banking system reached an elevated level of Rs457.2 billion, compared to Rs246.8 billion in the same period of FY22.

Simultaneously, the private sector also contributed to the NDA expansion during the period under review. The growing inflationary pressures in the economy prompted increased demand for credit to cope with rising input costs. This led to a rise in private sector credit, further bolstering the expansion of NDA. However, despite the NDA expansion, the growth in broad money supply was considerably offset by a sharp contraction of Rs1.15 trillion in the Net Foreign Assets (NFA) of the banking system. This contraction primarily stemmed from the dearth of external financing, uncertainty surrounding the resumption of an IMF programme, and deteriorating macroeconomic conditions. Scheduled repayments of external debt also exacerbated the situation, resulting in a significant decrease in NFA in both quarters of FY23.

When examining this contraction more closely, it becomes evident that the major impact came from the reduction in NFA of the State Bank of Pakistan (SBP). The NFA of commercial banks, on the other hand, saw a relatively modest decrease of only Rs116.7 billion during 1HFY23, compared to Rs8.0 billion in the corresponding period of FY22. Cumulatively, in 1HFY23, the NFA experienced a sharp decline of Rs1.15 trillion, marking a substantial contrast to the decrease of Rs227.5 billion during the same period of FY22.

Talking to WealthPK, Uzma Zia, a senior research economist at the Pakistan Institute of Development Economics (PIDE), said the remarkable growth in NDA, particularly driven by increased government borrowing, had been a significant driver of monetary expansion during this period. “While the government borrowing is a legitimate tool for financing deficits, the sustained elevated levels we’ve observed raise concerns about fiscal discipline and long-term fiscal sustainability. We must, therefore, emphasise the importance of a well-calibrated fiscal policy that balances the immediate fiscal needs with long-term economic stability and debt sustainability,” she explained.

“The rise in private sector credit, driven by inflationary pressures, also warrants scrutiny. While it’s essential to provide credit support to the private sector for economic growth, we need to ensure that it aligns with the broader economic objectives and does not contribute to overheating or financial instability,” the PIDE economist stressed. “Monitoring the quality and risk associated with private-sector credit is of paramount importance,” she added.

Credit: Independent News Pakistan (INP)