Macroeconomy: Some worrying signs

The government borrowing from the SBP is getting too high. The tax collection has remained low so far this year and the non-tax revenues have not been very encouraging either. Hence, fiscal revenues are short of target, whilst provincial transfers are too high. This implies higher deficit, and in the absence of large external avenues, financing is falling on domestic sources.

The difference between this year and previous fiscals in the PLMN government is the reliance of borrowing has shifted from commercial banks to central bank. Since it was an IMF condition to have net zero borrowing from the SBP; there was compliance. Now with the IMF out of the equation; government is conveniently breaching the SBP act and has started heavily borrowing from the central bank.

In essence, the difference is not much as during the fund programme, government was borrowing from commercial banks and latter were using SBP's discount window to keep liquidity afloat - OMO injection were continuously above Rs1 trillion.

The inflationary impact of direct SBP borrowing or indirectly routing by commercial banks through OMO is the same. However, there is a limit to it. The toll of SBP borrowing in 18 weeks of this fiscal year so far has crossed trillion rupees. Now that should raise red flags; and there should be some accountability to check this dangerous trend.

The monetary assets trend is becoming inflationary by the day. The net foreign assets (NFA) growth is squeezing - it grew by Rs34 billion this year to date versus Rs105 billion in the corresponding period last year. On the flip, the net domestic assets (NDA) increased by Rs109 billion versus fall of Rs63 billion same period last year.

Historically, NDA to NFA ratio has inverse relation with inflation in Pakistan - higher the ratio lower is the inflation and vice versa. The deteriorating ratio is calling for higher inflation. This coupled with skewed NDA towards central bank borrowing makes inflationary fears pronounced.

The only silver lining in the monetary aggregates is the respite in growing currency in circulation (CIC) trend. It had gone up by an alarming level in FY16 - Rs779 billion (more than half of M2 growth) as compared to Rs377 billion in FY15. This year so far, CIC up tick is curtailed to Rs172 billion versus Rs368 billion in the corresponding period last year.

Overall M2 growth increased to Rs143 billion (1.1%) this fiscal year to date against Rs39 billion (0.4%) in the same period last year.

There is nothing to cherish about private sector credit. Although, government heavily retired its papers from commercial banks, it was not enough to boost private credit. There has to be private sector credit growth to make higher M2 growth and low interest rates cycle meaningful. Or else, there would be inflation in years to come with no meaningful economic growth