Pakistan's M0 increased by 6% in May 2021
Banknotes in circulation increased by Rs.425 billion in May 2021
As per the Statement of Affairs of SBP, the balance sheet size of SBP increased by 8% for the week ended May 7, 2021. The total assets and liabilities increased by Rs. 1.1 trillion from Rs. 13.5 billion on April 30, 2021, to Rs.14.6 billion on May 7, 2021.
See below the liabilities section (click on the image to enlarge).
In the first post about central bank accounting, we learned that SBP has two departments: The issue department and the banking department.
SBP Act requires [SBP] to issue Banknotes against certain assets. Banknotes are issued by the Issue Department of SBP which is completely separate in terms of assets and liabilities from the Banking Department. The banking department is usually responsible for the stuff we normally follow SBP for (banking supervision, policy rate, FX market intervention, money market operations, refinancings, etc). From the SBP Act
26. Issue Department.
(1) The issue of bank notes shall be conducted by the Bank in an Issue Department which shall be separated and kept wholly distinct from the Banking Department and the assets of the Issue Department shall not be subject to any liability other than the liabilities of the Issue Department as hereinafter defined in Section 32.
SBP's balance sheet has a large number of line items in the liabilities section. But as per SBP Act, Issue Department liability is limited to Banknotes in circulation.
32. Liabilities of the Issue Department
(1) The liabilities of the Issue Department shall be an amount equal to the total of the amount of the bank notes for the time being in circulation.
On the asset side, these liabilities should be backed by specific assets
30. Assets of the Issue Department.
(1) The assets of the Issue Department shall not be less than the total of its liabilities
The snapshot above shows that SBP issued new currency notes of Rs.430 billion i.e. equivalent to 6% of outstanding banknotes. This should not be confused with new notes issued on Eid. Eid notes are usually replacement notes, i.e. banks hand over old notes to SBP and receive new notes in return. Here, SBP is actually increasing the M0 money supply by 6%.
In addition, the banking department credited the federal government account with Rs.534 billion.
Now let's see how is it reflected on the asset side.
The Pakistan Investment Bonds (PIBs) in the books of the issue department increased by Rs.435 billion. This is exactly in line with Section 30 of the SBP Act. PIBs were acquired by the issue department before it can increase the banknotes in circulation. These PIBs were internally transferred from the banking department to the issue department.
In the banking department, monetary policy assets increased by Rs.1 trillion. These are mainly PIBs and Market Treasury Bills which SBP acquires on a repo basis.
To summarize, the assets of SBP increased by Rs.1 trillion as SBP’s banking department acquired Rs.1 trillion of securities (PIBs and MTBs) in a repo transaction.
On the liability side, the banking department transferred Rs.435 billion of PIBs to the issue department to enable the issue department to issue new notes. The issue department printed incremental notes of Rs.430 billion. These notes would have been sent to commercial banks from whom SBP acquired the PIBs.
The balance of the liability (Rs. 1 trillion less Rs.430 billion of new notes issued) was credited to the federal government’s account. I would have presumed that SBP would have purchased PIBs from the secondary market, which would have resulted in crediting the account of commercial banks. However, here SBP is crediting the account of the Federal government which is what would have happened if SBP had acquired the PIBs in the primary market (an activity that is prohibited). Probably this is how SBP accounts for repo operations in its Statement of Affairs.