Money supply shrinks 1.3pc in Q1 as cash holdings drop

KARACHI: Pakistan's money supply contracted by 1.3 percent to Rs31.11 trillion in the first quarter of fiscal year 2023/24, as cash holdings declined and credit to the private sector slowed amid high interest rates, data showed on Wednesday.

The broad money, or M2, a measure of money circulating in the economy, fell from Rs31.53 trillion at the end of June, according to data from the State Bank of Pakistan (SBP) cited by brokerage Arif Habib Limited.

As of September 22, the broad money or M2 stood at Rs31.11 trillion. On a week-on-week basis, M2 decreased by 0.1 percent. As of September 15, it was Rs31.13 trillion.

The currency in circulation (CiC), which reflects the cash holdings of businesses and households, dropped by 8.5 percent to Rs8.37 trillion in the July-September period, reducing its share in the money supply to 26.9 percent from 29 percent in June. According to data, Pakistan's cash holdings have decreased by roughly one trillion rupees during the last three months, a sign that businesses and households have parked their cash in banks due to high deposit rates and a decline in investment in the stock, money, and real estate markets. Banks have seen an uptick in their remunerative deposits.

Total deposits with banks rose 1.7 percent to Rs22.6 trillion in July-September FY2024. The auto industry has also been experiencing a decline in demand as a result of exorbitant prices, stricter rules on consumer credit, and a general decline in purchasing power.

The broad money growth decelerated to 12.7 percent as of September 22 on a year-on-year basis from 14.2 percent observed at the end of June.

"External flows have been minimal, while domestic assets have declined," said Fahad Rauf, the head of research at Ismail Iqbal Securities.

"Private sector credit has dropped due to the weak economic situation and exorbitantly high interest rates, resulting in excess liquidity within the banking system for the period under measurement," Rauf added.

The net domestic assets of the banking system were negative Rs517 billion during July-September FY2024. This compared with Rs655 billion in the same period a year earlier.

The private sector repaid Rs258 billion to the commercial banks in July-September FY2024, compared with Rs697 million a year earlier.

The State Bank of Pakistan, in its last monetary policy statement, said that the expected fiscal consolidation, realization of planned external inflows, and uptick in economic activity would provide space for a moderate expansion in private sector credit this year.