- Reserve Money (M0): Currency in circulation + Bankers’ deposits with the SBP + ‘Other’ deposits with the SBP = Net SBP credit to the Government + SBP credit to the commercial sector + SBP’s claims on banks + SBP’s net foreign assets + Government’s currency liabilities to the public – SBP’s net non-monetary liabilities.
- M1: Currency with the public + Deposit money of the public (Demand deposits with the banking system + ‘Other’ deposits with the SBP).
- M2: M1 + Savings deposits with Post office savings banks.
- M3: M1+ Time deposits with the banking system = Net bank credit to the Government + Bank credit to the commercial sector + Net foreign exchange assets of the banking sector + Government’s currency liabilities to the public – Net non-monetary liabilities of the banking sector (Other than Time Deposits).
- M4: M3 + All deposits with post office savings banks (excluding National Savings Certificates).
Present Compositions of Monetary Aggregates in Pakistan
In case of Pakistan, the existing definition of money supply seems to be based on functional approach and includes those financial assets which are highly liquid. Among other factors, quantitative significance of financial assets and the availability of data appear to be important consideration for inclusion as a component of current monetary aggregates.
The narrow definition of money supply (M1) includes currency in circulation (CIC), other deposits with SBP and the demand deposits of the scheduled banks. The broad definition (M2) consists of M1, time deposits and resident foreign currency deposits with the scheduled banks. This implies that M2 takes into account not only those financial assets which can directly be used as a medium of exchange but close substitutes of liquid assets also.
Demand and time deposits of the scheduled banks for the definition of money supply, however, do not take into account the deposits of the government and the foreign constituents (non-residents). The governments’ deposits are generally excluded due to non-responsiveness of these deposits to macroeconomic variables like changes in national income, interest rate, exchange rate etc (see IMF Manual 2000). Moreover, monetary and fiscal policy formulation also lends credence to the exclusion of these deposits, as the policy focuses in generally on the net government borrowing from the financial institutions. The non-resident deposits holding are excluded as these deposits are primarily used for international payments, instead of domestic transactions (see IMF Manual 2000).
