23 - 29 March 2000

Broad money drops in January

by a staff reporter

After two months of strong growth, broad money, M3, dropped by Lm2.7 million, or 0.1 per cent, in January, when a reduction in net foreign assets offset a further increase in domestic credit. As a result, the annual rate of growth of broad money fell by a full percentage point to 8.8 per cent.

Offsetting an increase in quasi-money, narrow money, M1, accounted for the entire drop in broad money during the month so that its annual growth rate, which had increased sharply in December to 10.7 per cent, fell to 10.2 per cent. Currency in circulation fell by Lm7.8 million in January, partly in line with the normal seasonal pattern and possibly because concerns about the millennium changeover that had fuelled demand for cash in December proved misplaced. Demand deposits decreased by Lm4.7 million, or 2.4 per cent, mainly reflecting lower balances in private corporate accounts.

Quasi-money grew by Lm9.8 million in January, or 0.5 per cent. Nevertheless, the annual rate of growth continued to fall, dropping from 9.5 per cent in December to 8.4 per cent in January. Savings deposits and time deposits both increased moderately, rising by 0.4 per cent and 0.6 per cent respectively, although residents' deposits denominated in foreign currency decreased. Deposits belonging to households and enterprises rose, but bearer deposits fell significantly following the introduction of measures, outlined in the Budget, aimed at phasing them out completely. Deposits with a term to maturity of less than one year accounted for most of the increase in time deposits.

The net foreign assets of the banking system contracted in January, by Lm2.6 million, or 0.3 per cent, such that the annual rate of growth dropped to 6.8 per cent. The Central Bank's external reserves decreased by Lm7.7 million, or one per cent, largely because of payments for oil.

This drop was partly offset by an increase in the net foreign assets of the banks, which expanded by Lm5.1 million, or 2.6 per cent. This is mainly attributable to interest earned on the foreign assets of the international banks, which had no impact on monetary aggregates since it was counter-balanced by an increase in their nonmonetary liabilities.

Domestic credit continued to expand in January, adding Lm12.6 million, or 0.6 per cent, thereby providing a stimulus to monetary growth. The annual rate of growth continued to accelerate as a result, rising from 9.6 per cent to 10.4 per cent. A drop in the Government's deposits with the Central Bank led to an increase in net claims on government, which rose by Lm11.1 million.