Monetary expansion up by 14pc......

KARACHI: The massive government borrowing has contributed around 90 per cent in the monetary expansion which grew by 14.24 per cent in the 2010-11 ended June 30, 2011, the State Bank reported on Tuesday.
Monetary expansion through the private sector is a requirement for economic growth, but massive government borrowing from banking system only inflates the economy as was reflected in above 13 per cent inflation rate in the last fiscal year.
The central bank in its third quarterly report for FY11, which was issued on Monday, noted the government borrowing for budgetary support, fiscal slippages and inadequate external funding had recorded over 30 per cent increase during July 1-May 28, 2010-11.
“This accounts for 89.7 per cent of the expansion in broad money,” said the SBP. The latest report up to June 25 showed that the monetary expansion was up by Rs824 billion reflecting absolute domination of the government borrowing. The government had borrowed Rs716 billion.
The Net Foreign Asset (NFA) of the banking system showed an expansion of Rs170.8 billion mirroring the comfort in the external account during this period.
However, Net Domestic Asset (NDA) increased sharply by Rs507.1 billion, said the SBP. Up to June 25, the borrowing for budgetary support reached Rs716 billion, much higher than Rs452 billion of the preceding year.
The third quarterly report, which covered the period of July-May, said while private sector business continued to utilise bank credit, there was hardly any credit demand for new investment activities in the economy.
Specifically, the growth of credit to private sector was slightly lower at 3.4 per cent during July to May 28, 2011 compared to 3.6 per cent over the same period in FY10.
The report said the working capital loans during July-April 2011 jumped to Rs144.7 billion against Rs47.4 billion in the corresponding period of FY10.
The exorbitant price increase of raw materials played a key role in the higher demand for the working capital.
“This three-fold increase in demand for working capital loans is due to the rise in raw material prices, especially of cotton, sugarcane and edible oil,” the report said.
The surge in exports increased the demand for trade loans. These loans increased by Rs68 billion during July-April 2011 compared to Rs21 billion in the previous year. The sector-wise distribution of trade loans reflects the dominance of the textile sector, which accounts for 71.6 per cent of the rise. The textile sector which boosted its export by 22 per cent during the last fiscal got highest amount as working capital.
“Both textile and sugar sectors accounted for 68.5 per cent of the rise in working capital loans over the period of analysis,