Domestic Liquidity holds the key
Domestic liquidity (M2) has failed to keep pace with growth in monetary base in Jul-
Nov 09, 4.2% vis-à-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 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.
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