10 -16August 2000

Substantial rise in banks' non-monetary liabilities

Broad money, M3, which consists of currency in circulation and residents' deposits with the banking system, contracted by Lm6.3m, or 0.3 per cent, in June. As a result, the annual rate of broad money growth continued to fall, dropping to five per cent from 6.7 per cent in May.

While both the main determinants of monetary growth, net foreign assets and domestic credit, contributed marginally to growth, the decline in broad money was reflected in a substantial rise in the non-monetary liabilities of the banking system, which is captured by the "other items (net)" figure.

Narrow money, M1, which includes currency in circulation and demand deposits, accounted for the entire drop in M3 during the month. M1 fell by Lm6.5m, with the annual growth rate dropping from 8.3 per cent in May to five per cent as a result.

Movements in narrow money largely reflected developments in demand deposits, which fell by Lm9.9m, or 4.9 per cent, in June after a sharp rise in May. Demand deposits belonging to private firms, as well as those held by public sector enterprises, decreased. At the same time, in line with seasonal trends, currency in circulation increased by Lm3.4m.

For the second month in a row quasi-money remained unchanged. However, its annual rate of growth also continued to fall, dropping by over a full percentage point to five per cent. Savings deposits decreased for the fourth consecutive month, by 0.4 per cent. In contrast, time deposits increased by 0.2 per cent as growth in deposits belonging to households offset a drop in those belonging to private firms. Deposits with terms to maturity below one year accounted for most of the rise.

Domestic credit remained unchanged in June as higher claims on the private and parastatal sector offset lower net claims on government. Nevertheless, the annual rate of growth of domestic credit accelerated to 7.1 per cent since, during June 1999, total credit had declined significantly as privatisation receipts emanating from the sale of government shares in Mid-Med Bank had resulted in a sharp fall in the banking system's net claims on government.

During June a reduction in the banks' holdings of government stocks outweighed an increase in their Treasury bill portfolio and lowered net claims on government for the second month in a row. Thus, net claims on government contracted by Lm10.6m, or 2.8 per cent, in June. A statistical revision that corrected an earlier misclassification of bonds issued by the private sector also contributed.

On the other hand, bank claims on the private and parastatal sectors rose by Lm10.7m, or 0.6 per cent, in June. Whereas claims on the parastatal sector decreased slightly, claims on the private sector expanded by Lm11.2m. Loans and advances to private borrowers rose by Lm2.3m, whereas other claims, including holdings of bonds issued by the private sector, increased by Lm8.9m, boosted by the reclassification referred to above.

The net foreign assets of the banking system increased by Lm31.2m, or 3.4 per cent, in June. Almost all the rise took place in the net foreign assets of one international bank, which had no impact on monetary aggregates since this was reflected in the net non-monetary liabilities of this institution. After having risen in May, the net foreign assets of the monetary authorities returned to a downward trend in June. The Central Bank's external reserves dropped by Lm8.4m, or 1.2 per cent, largely as a result of net sales of foreign exchange to banks and payments on behalf of customers. Consequently, the annual rate of growth of the Bank's external reserves continued to decelerate and stood at 2.6 per cent.

The decrease in the Central Bank's external reserves was outweighed by an increase in the net foreign assets of the remainder of the banking system, which rose by Lm39.5m, or 19.4 per cent, during the month. The net foreign assets of domestic banks, which increased by Lm8.5m, accounted for part of this rise. At the same time, the net foreign assets of the international banks expanded by Lm31m, or more than one fifth.

Further economic and monetary information can be obtained from the website of the Central Bank of Malta:

www.centralbankmalta.com.