Domestic liquidity (M2) has failed to keep pace with growth in monetary base in Jul-Nov 09, 4.2% vis-a-vis 13.2%, on the back of a decline in money multiplier. We believe this could be seasonal and should normalize somewhat going forward.
Credit distribution on the other hand has remained skewed towards the government at the cost of private sector. We believe that this needs to normalize towards the private sector in order to buttress the recovery process.
The normalization of credit now hinges on sequential improvement in NFA of the Central Bank amid cash reversals into the system as budget monetization is not exercisable under the IMF program to fill the liquidity gap.
News flow suggests domestic liquidity could receive a boost with receipts from US of US$850mn by Dec-09 (KL and CSF). The caveat is govt. borrowing from the SBP.
KASB Securities and Economics Research
December 21 2009
