ISLAMABAD: In a notable economic development, the broad money (M2) growth in Pakistan witnessed a deceleration to 13.7% year-on-year as of November 24, 2023, marking a decline from 14.2% recorded at the end of June. The deceleration is primarily attributed to the net retirements in private sector credit and a more than seasonal decline in commodity operations financing, according to recent data.
Reserve money, tracking a similar trajectory, also experienced a slowdown from June, largely influenced by a significant deceleration in currency in circulation. The deceleration in both broad money and reserve money signifies a shift in the economic landscape, shaped by various factors influencing the financial sector.
One key factor contributing to the deceleration is the net retirements observed in private sector credit. The reduction in credit activity The whole financial environment has been shaped by the private sector. Beyond what is usually seen seasonally, a reduction in financing for commodity operations has also contributed to the slowdown in broad money growth.
In addition, the report shows that net domestic assets have decreased since June, which adds to the overall decline. On the flip side, the net foreign assets of the State Bank of Pakistan (SBP) and the broader banking sector experienced expansion since June, driven by large foreign exchange (FX) inflows in July. This alteration in the mix of assets has led to the complicated dynamics of broad money and reserve money.
Experts said that although the slowdown in the rise of broad money may prompt concerns about the state of the economy, it might also be the consequence of tactical changes made by the financial industry. A moderate approach by financial authorities is suggested by the decrease in the amount of money in circulation and the cautious handling of credit retirements in the private sector.
Senior economist at SBP Shahid Javed told WealthPK that the significant net retirements seen in private sector lending were the main cause of this slowdown. “This deliberate decline in private sector loan activity points to a sophisticated strategy by financial regulators, potentially intended to correct the credit balance and promote a more regulated lending environment.
These gradual modifications are essential to preserving financial stability and averting possible overheating in specific industries.
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He added that the drop in funding for commodity activities that was more than seasonal was another element in the slowdown. This departure from the anticipated pattern highlights how particular economic circumstances affect changes in the money supply. The unusual drop in funding for commodity operations coupled with a reduction in loans to the private sector highlights how difficult it is to manage monetary policy in a changing economic climate.
The improved compositional mix of reserve money and wide money, according to the SBP economist, points to a more stable and equitable financial environment.
Attention will be paid to how policymakers react as Pakistan moves through these changes to guarantee a stable and balanced financial sector that fosters sustainable economic growth. The intricate interactions between the variables affecting reserve money and broad money demonstrate how crucial it is to have a thorough grasp of the economy in order to make wise policy decisions, the speaker said.