The SBP reported that both net domestic asset and net foreign asset of the banking system were higher than last year. — File Photo

KARACHI: Monetary expansion in the first seven months of the current fiscal year as reported by the State Bank on Tuesday grew at an alarmingly high rate of 8.6 per cent, reflecting uninterrupted government borrowing from banking system and the central bank. The SBP reported that both net domestic asset (NDA) and net foreign asset (NFA) of the banking system were higher than last year, pushing the broad money (M2) to expand at a bigger pace.

Higher monetary expansion, while reflecting the deteriorating fiscal discipline, is also a sharp catalyst for acceleration in inflation. The January inflation slightly slipped to 14.19 per cent compared to over 15 per cent in December.

However, government geared up its borrowing and borrowed equally from both the State Bank and scheduled banks. From July to Feb 4, the government borrowed Rs231 billion from each source.

The SBP said the government has borrowed Rs411 billion as budgetary supports during the first seven months of the current fiscal year.

The fiscal pressure was so high that the government decided to dissolve the cabinet and bring a small size cabinet to save money. This austerity measure could produce some positive results but the way monetary expansion is taking shape, could jeopardise government’s effort to the fiscal deficit, said a senior official.

Analysts said monetary growth is alarmingly high as it grew by Rs496 billion (8.6 per cent) during this period. This growth is 55 per cent higher than what it was in the corresponding period of previous year.

Last year monetary expansion grew by 5.33 pre cent in the first seven months and in terms of money it enlarged by Rs273 billion, showing a wide difference in the volume of money joining the expansionary liquidity of the system.

However, they said high NFA was another reason for greater monetary expansion and that was due to record inflows through remittances.

The NFA rose to Rs125 billion against minus Rs56 billion during the same period last year.

Similarly, NDA was also on higher side as it grew by Rs371 billion noting a 7.1 per cent growth. However, during the same period of last year, net domestic asset grew by same 7.1 per cent but the amount was much lower (Rs223 billion).

The expansionist monetary growth is a clear indication that inflation would continue to rise in the coming months despite a slight decline in CPI in January. The CPI decline in January was termed temporary; and the reason was over $700 million inflows under Coalition Support Fund which slashed the tall figure of government’s borrowing from the SBP.

It was observed that some analysts were watching keenly the government’s move to bring down prices of consumer items, fearing possibility of some unrest like situation recently witnessed in few countries of Middle East.

“There is no doubt that one of the strongest reasons for unrest in few Middle Eastern countries was severe poverty dominated by higher prices of common consuming items,” said a senior analyst.