ISLAMABAD: The Net Foreign Assets (NFA) of the banking system recorded a sharp contraction of Rs 215.2 billion during first half of the current fiscal year in contrast to a rise of Rs 17.2 billion during the same period in previous fiscal year.
“Within the banking system, the contraction was entirely stemming from SBP’s NFA, as the onus of financing the external deficit fell largely on the central bank,” a well placed source in Finance Ministry told Customs Today on Friday, adding that in fact drying up of financial inflows in recent past was a main reason for this contraction.
“Ballooning net foreign assets (NFA) of the banking system were the key drivers of the exceptionally strong economic growth while ccontraction in NFA is mainly due to reduction in State Bank of Pakistan foreign exchange reserves that arose from the widening of current account deficit and deteriorating capital and fiscal account surpluses” the source added.
The source said that government borrowed directly from SBP either through Ways and Means Advance or purchase of Market Related Treasury Bills (MRTBs) which extended for Government borrowings up to Rs.100 million at an interest rate of 4% per annum whereas higher amounts were borrowed through purchase of 6-month MTBs at the weighted average yield of 6-month MTB determined in the most recent fortnightly auction of treasury bills. “The weighted average yield on 6-month MTB was 9.49% as a result of the auction conducted in December 2014” the source said.
Historically, the source said that foreign exchange reserves had mostly remained at a critically low level because of its balance of payments difficulties, NFA accumulation had never been a major factor in the expansion of money supply therefore, and the State Bank had rarely been required to use policy tools to sterilize its monetary impact.
”As the banking system accumulates NFA, money supply rises by the same extent unless its impact is sterilized through policy action” the source said making it clear that neither accumulation of NFA nor the extension of credit to the private sector were responsible for excessive money creation as historical monetary data confirm that the main factor had been excessive public sector borrowing from the State Bank and commercial banks.
“In this situation, the SBP is required to manage money growth so as to ensure control of inflation because, at the macro level, the quantity of money in relation to the quantity of goods and services determines price levels and controlling inflation was the primary responsibility of a central bank” the source added saying that a persistently higher rate of growth in money supply as compared to the real rate of growth of the economy inevitably led to increases in prices.
The source said that one of the functions of a central bank in modern times was to regulate money supply and the State Bank of Pakistan (SBP) Act also stated that the bank’s main task was “to regulate the monetary and credit system … with a view to securing monetary stability and fuller utilization of the country’s productive resources”.
“A policy framework and institutional mechanism are provided in the SBP Act which gives the State Bank the necessary statutory power and authorities to regulate money supply by formulating and conducting an independent market-based monetary policy” the source observed.
