Ratio of currency in circulation to money supply hits 9-year low

KARACHI: Pakistan’s currency in circulation (CiC) as a percentage of the overall money supply (M2) fell to its lowest level in nine years as of June 2024.

This decline is attributed to higher interest rates, which have led to greater deposit penetration. The ratio of CiC to broad money dropped to 25 per cent from 29 per cent as of June 2023, according to the latest data from the State Bank of Pakistan.

“The sharp decline [in CiC to broad money ratio] is attributed to the record-high policy rate, which has effectively prompted increased deposit penetration due to higher savings rates on offer,” said AKD Securities Limited in a note.

M2 increased by 16 per cent to Rs36.6 trillion in the fiscal year 2024. In Pakistan, M2 is the most widely used definition of broad money. From the liability side, it is measured as a sum of currency in circulation: total deposits of the non-government sector, including residents’ foreign currency deposits, and other deposits with the SBP, according to the information posted by the SBP on its website. And from the asset side, M2 is a sum of the net domestic assets and net foreign assets of the banking system (SBP and scheduled banks), it said.

CiC has experienced ups and downs; at times, it has increased and reduced. The primary reason for the decline is the attractive interest rates banks provide on savings accounts amid historic high interest rates. The drop in CiC was brought on by an increase in deposits in the banking sector.

The deposits with banks climbed by 5.1 per cent to Rs25.598 trillion between January and June of this year.

Interest rates were lowered last month for the first time in four years as a result of a slight decline in inflation amid tight policies and slow growth. Last month, the SBP cut its benchmark interest rate by 150 basis points to 20.5 per cent after maintaining at 22 per cent since July 2023.

Analysts have differing views on whether the SBP will continue lowering interest rates or choose to keep rates unchanged at its upcoming policy review later this month.JS Global noted that with the July consumer price index, inflation is expected to decrease to 10.5 per cent, despite a 1.6 per cent increase month-on-month, Pakistan’s real interest rates (RIR) remain at sky-high levels, expanding to 10 percentage points (ppt).

“To recall, even with a rate cut in June, Pakistan’s RIR was at 8 ppt, despite inflation softening from 38 per cent just a year ago to 12.6 per cent in June,” it said.“This trend of abating inflation strengthens the monetary policy committee’s case for continuing the easing cycle at its upcoming July meeting, in our view. We expect another 1.5 cut in the upcoming MPS [monetary policy statement],” it added.