Regulatory Alerts2020-01-01
Monetary Developments Report – Third Quarter 2020
The Palestinian Monetary Authority issued its Third Quarter 2020 Monetary Developments Report, detailing a 3.1% rise in local liquidity to $13.2 billion, a 2.9% decline in reserve money to $1.6 billion, and a 10.5% drop in official foreign reserves to $624.6 million. The report highlights a contraction in legal bank liquidity to 41.4%, a narrowing interest rate margin across USD, JOD, and ILS, and a 2.9% increase in M2 money supply to $17.7 billion, driven by a revised methodology for estimating currency in circulation outside the banking system. These developments reflect the impact of the COVID-19 pandemic and the stock market crisis on credit demand, deposit growth, and overall monetary conditions in the Palestinian economy.
Monetary Developments Report – Third Quarter 2020
Monetary Developments Report
Research and Monetary Policy Department November 2020
Third Quarter 2020
© Palestinian Monetary Authority, 2020. All rights reserved.
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Table of Contents Executive Summary ........................................................................................................................ iii Concepts and Definitions 1 .................................................................................................................. 1 First: Local Liquidity ..................................................................................................................... 2 Second: Reserve Money ................................................................................................................... 4 Third: Official (Foreign) Reserves of the Palestinian Monetary Authority 4 ................................................................................... 4 Fourth: Legal Liquidity of Banks 5 ....................................................................................................... 5 Fifth: Analysis of Interest Rates on Deposits and Loans 5 .................................................................................. 5 Sixth: Money Supply (M2) Developments in Palestine 6 ...................................................................................... 6 Appendices 8 ...................................................................................................................................... 8 Appendix (1): Estimation of Currency in Circulation and Money Supply (M2) in Palestine 8 ............................................................. 8 Appendix (2): Central Bank Survey .................................................................................... 9 Table (3): Licensed Banks Survey in Palestine (Other Deposit-Taking Corporations) 10 ................................................ 10 Table (4): Central Bank and Licensed Banks Survey in Palestine (Deposit-Taking Corporations) 11 ..................................... 11
1 Monetary Developments Report – Third Quarter 2020 Definitions and Concepts
- Local Liquidity: Defined as the sum of the broad money (M2) components, including: 1.1 Local Assets: Comprises the net assets of the monetary authority (the Palestinian Monetary Authority and the banking sector) net of local deposits (including time deposits), and net assets on the Palestinian economy (loans, mortgages, securities (excluding monetary authority securities)). Local Foreign Assets: Comprises the difference between foreign assets and foreign liabilities of the monetary authority that are not included in the definition of reserve money, including deposits and liabilities of entities other than the monetary authority. Net Other Liabilities: Comprises the difference between other liabilities and other assets, which are not included in the calculation of local liquidity. 1.2 Liabilities: Comprises the broad money (M2) components, including non-banking sector deposits (comprising demand deposits, savings deposits, and time deposits on which the banking sector has no control (excluding monetary authority deposits)). In the Palestinian case, and due to the absence of a national currency and the lack of knowledge regarding the amount of currency in circulation outside the monetary authority (excluding it from the definition of local liquidity to the non-banking sector), the concept of local liquidity is limited to deposits other than non-controlled deposits only. Reserve Money: Comprises the banking sector's deposits with the Palestinian Monetary Authority, whether mandatory or voluntary. Legal Liquidity: Comprises the broad money (M2) components, including the sum of banking sector deposits and controlled liabilities with the banking sector. Official Reserves: Comprises the net foreign assets of the monetary authority (foreign transactions that can be readily converted into domestic currency and are held by the monetary authority to support the domestic currency, including foreign currency deposits and other foreign assets).
2 Monetary Developments Report – Third Quarter 2020 Local Liquidity Developments Local Liquidity: Local liquidity increased by 3.1% during the third quarter of 2020 compared to a 2.8% increase in the second quarter of the same year. This increase is attributed to a 3.4% rise in net local credit and a 2.1% increase in net foreign assets during the same period, reaching a total local liquidity of $13.2 billion. These increases are attributed to changes in the factors affecting liquidity and its components, as follows: 2.1 Factors Affecting Local Liquidity
- The positive impact of net local assets (net local credit) on the total factors affecting liquidity changes during the third quarter of 2020 compared to March of the same year. Local liquidity increased by 3.4% compared to a 4.3% increase in the second quarter of the same year, reaching $9,923.6 million. This increase was primarily driven by a 3.4% rise in net advances to the monetary authority, which increased advances to the monetary authority by 15.3% to reach $2,053.8 million. This followed an increase in mortgage loans from the beginning of the banking sector to the monetary authority due to the ongoing crisis and the stock market crisis. Conversely, monetary authority deposits decreased by 18.3% during the same period, and advances to local institutions decreased by 10.8% to reach $19.0 million during this quarter compared to the second quarter of the same year. On the other hand, increases in advances to other sectors contributed to the stability of local assets, as advances to the public sector decreased by 0.2% to reach $8,108.5 million, and other controlled government liabilities decreased by 2.1% to $57.8 million. Additionally, net advances to non-controlled public sector liabilities decreased by 7.7% to reach $7.6 million.
- The increase in net foreign assets and its positive impact on local liquidity during the third quarter of 2020 compared to a 2.1% increase compared to a 1.1% increase during the second quarter, reaching $5,297.4 million. This increase in net foreign assets was primarily driven by a rise in non-controlled advances to approximately $6,094.8 million, compared to a 0.5% increase in non-controlled deposits to $797.4 million.
- Securities and other assets decreased at the end of the third quarter of 2020 by 1.5% compared to the second quarter to reach approximately $1,992.9 million.
- Net other liabilities, excluding monetary authority liabilities in the Palestinian Monetary Authority and the banking sector's liabilities, which are not included in the calculation of local liquidity, decreased by 29.8 million dollars compared to a decrease of 32.0 million dollars in the second quarter. 2.2 Components of Local Liquidity Data related to the calculation of local liquidity components at the end of the third quarter of 2020 indicate a slight decrease in the share of reserve money to less than one month, reaching its effective share of 55.4% of total local liquidity, compared to an increase in the share of reserve money to 44.6%, reflecting the impact of the Palestinian Monetary Authority's regulations during the crisis period, including the postponement of loan maturities for four months. The total deposits falling under the definition of local liquidity reached $13.2 billion at the end of the third quarter of 2020, compared to $12.8 billion in the second quarter of the same year, as liquidity components experienced significant increases in the third quarter of 2020:
- The share of reserve money increased by 4.9% during the third quarter of 2020, compared to a 5.2% increase in the second quarter, and compared to the third quarter of 2019 by 11.2% to reach $5,886.7 million.
- The share of quasi-money (other deposits) increased by 1.8% compared to the second quarter, and by 6.9% compared to the third quarter of 2019 to reach $7,311.2 million.
3 Monetary Developments Report – Third Quarter 2020 Reserve Money: Reserve money decreased by 2.9% during the third quarter of 2020 compared to the second quarter, compared to a 0.9% decrease in the second quarter of the year, reaching $1,598.4 million. This decrease was primarily due to a 3.6% decrease in mandatory reserves to $1,409.7 million, compared to a 2.5% increase in other reserves to $188.7 million during the same period. Compared to the third quarter of the previous year, reserve money increased by 15.8%, primarily due to mandatory reserves by 18.0% and other reserves by 1.4%.
Third: Official (Foreign) Reserves of the Palestinian Monetary Authority Official reserves of the banking sector decreased during the third quarter of 2020 compared to the second quarter by 10.5% compared to a 5.5% decrease in the second quarter of the same year, reaching $624.6 million. This decrease was primarily due to a 12.5% decrease in foreign currency reserves to $515.1 million, compared to a 0.3% increase in other reserves (including non-Palestinian securities) to $109.5 million. These reserves increased by 3.6% compared to the third quarter of 2019. In the same period, the share of official reserves from reserve money (broad money M2) decreased by 3.5% compared to 4.1% in the second quarter.
Fourth: Legal Liquidity of Banks The share of legal liquidity in the third quarter of 2020 decreased by one basis point compared to the second quarter, reaching 41.4% compared to 42.4% in the second quarter of the year. This decrease was primarily due to a 1.4% decrease in stable deposits (numerator) to approximately $5,515.6 million, compared to a 1.0% increase in stable liabilities (denominator) to $12,277.0 million during the same period. Thus, legal liquidity decreased by one basis point compared to the third quarter of 2019, and the share of legal liquidity for banks remains higher than the minimum legal liquidity (25%) set by the Palestinian Monetary Authority's regulations.
Fifth: Analysis of Interest Rates on Deposits and Loans Data for the third quarter of 2020 shows a decrease in the average interest rates on all currencies compared to the second quarter, as the average interest rate on loans (USD currency) reached 5.36% compared to 5.71% in the second quarter, while the average interest rate on loans reached 6.95% compared to 6.90% on the Jordanian Dinar, and on the Israeli Shekel it reached 6.75% compared to 7.08% during the same period. On the deposit side, the average interest rates on deposits reached 2.38% for USD deposits compared to 2.32% in the second quarter, and 2.74% for JOD compared to 2.51%, and 2.46% for ILS compared to 2.07% during the same comparison period. These changes reflect a narrowing interest rate margin across all currencies in the Palestinian market, as the margin on USD reached 2.98 percentage points, 4.16 percentage points on JOD, and 4.29 percentage points on ILS.
4 Monetary Developments Report – Third Quarter 2020 Sixth: Money Supply (M2) Developments in Palestine Due to the difficulty of calculating the amount of currency outside the monetary authority (excluding the public sector), the Palestinian Monetary Authority has previously estimated the amount of currency (excluding the Israeli Shekel) from the Israeli Shekel currency from neighboring countries to the banking sector in Jordan, and transferred it to Palestine, considering the banking sector's role in providing funds to individuals in the Palestinian territories, as well as customs, traditions, and the banking and economic system, and the lack of savings and spending habits, and the recent liquidity shortage:
- Estimating the amount of currency in the Palestinian economy (excluding it from the amount of demand deposits in Jordan) across currencies over a certain period. For calculation purposes, the average ratio of demand deposits (Jordanian currency) to banking sector deposits in Palestine from the Jordanian banking sector to the banking sector in Palestine was used. This ratio represents the amount of currency outside the Jordanian banking sector for banking sector deposits in Palestine. In contrast, the denominator of this ratio represents the amount of demand deposits held by the Jordanian banking sector, which is equal to the amount of demand deposits (Jordanian Dinar) for banking sector deposits in Palestine, to estimate the amount of currency.
- Adding the estimated amount of currency outside the monetary authority to the total deposits (demand, savings, and time) in Palestine across all currencies (including monetary authority deposits and non-controlled deposits) to estimate the amount of some money (M2) as clarified in the table below. Given this shortage in Palestine, the results of estimating the amount of currency outside the monetary authority and some money (M2) are as follows: As shown in Appendix 1, some money (M2) in the third quarter of 2020 increased by 2.9% compared to the second quarter of the same year, reaching the total amount of some money (M2) at the end of the third quarter of 2020 to $17.2 billion, reflecting a 3.1% increase in total deposits to reach $13.2 billion or 74.6% of some money (M2), and an increase in currency outside the banking sector (Circulation in Currency) by 2.2% compared to the second quarter to reach $4,484.5 million or 25.4% of total some money (M2).
5 Monetary Developments Report – Third Quarter 2020 Appendices Appendix (1): Estimation of Currency in Circulation and Money Supply (M2) in Palestine
| Currency in Jordan (1) | Demand Deposits in Jordan (2) | Jordanian Currency for Banking Sector in Palestine (3) | Currency in Palestinian Economy (3)-(1)=(4) | Currency/Demand Deposits (%) ((3)+(2))/(4)=(5) | Demand Deposits in Palestine (6) | Savings & Time Deposits in Palestine (7) | Total Deposits in Palestine (Excl. Monetary Authority Deposits) =(8) (7)+(6) | Currency in Palestine =(9) (6)*(5) | Some Money M2 in Palestine (7)+(9)=(10) |
|---|---|---|---|---|---|---|---|---|---|
| 4655.0 | 818.2 | 3836.9 | 2558.6 | 1278.3 | 64.0 | 1782.1 | 254.7 | 2539.1 | 2006 |
| 5651.2 | 1029.4 | 4621.8 | 3046.5 | 1575.3 | 65.3 | 1910.1 | 262.3 | 2660.7 | 2007 |
| 6521.8 | 1296.3 | 4225.5 | 3479.2 | 1746.3 | 74.2 | 2374.3 | 290.5 | 2908.2 | 2008 |
| 6811.1 | 1266.9 | 5544.2 | 3575.0 | 1969.2 | 64.3 | 2364.4 | 315.1 | 3360.0 | 2009 |
| 7492.7 | 1396.5 | 6096.2 | 3815.7 | 2280.5 | 61.2 | 2487.7 | 355.9 | 3706.4 | 2010 |
| 7737.7 | 1397.7 | 6339.9 | 3904.6 | 2435.3 | 57.4 | 2651.6 | 367.7 | 4252.2 | 2011 |
| 8496.9 | 1728.6 | 6768.2 | 4157.4 | 2610.9 | 66.2 | 2872.5 | 342.5 | 3996.1 | 2012 |
| 9816.1 | 2318.9 | 7497.2 | 3675.5 | 3822.1 | 60.7 | 3175.3 | 431.3 | 4801.8 | 3606.6 |
| 10311.8 | 2276.3 | 8035.5 | 3970.9 | 4064.6 | 56.0 | 3314.1 | 490.4 | 5427.3 | 3804.4 |
| 11202.9 | 2335.4 | 8867.5 | 4388.8 | 4478.7 | 52.1 | 3386.2 | 547.0 | 5947.0 | 3933.2 |
| 12376.7 | 2610.8 | 9765.9 | 4856.8 | 4909.1 | 53.2 | 3606.2 | 575.1 | 6205.6 | 4181.3 |
| 13900.1 | 2897.8 | 11002.3 | 5908.5 | 5093.8 | 56.9 | 3675.2 | 651.3 | 5809.0 | 4326.5 |
| 14515.3 | 3103.4 | 11411.9 | 6379.6 | 5032.3 | 61.7 | 3691.1 | 605.3 | 5379.9 | 4296.4 |
| 15968.0 | 3415.2 | 12552.8 | 7099.0 | 5453.8 | 62.6 | 3975.0 | 656.0 | 5691.8 | 4631.0 |
| 16335.2 | 3894.5 | 12440.8 | 7103.5 | 5337.2 | 73.0 | 4671.2 | 647.6 | 5754.1 | 5318.8 |
| 17182.3 | 5102.8 | 12795.2 | 7182.4 | 5612.7 | 78.2 | 5856.6 | 671.8 | 5774.7 | 2020 Q2 |
| 17682.4 | 5906.0 | 13197.9 | 7311.2 | 5886.7 | 76.2 | 732.0 | 5174.0 | 6059.7 | 2020 Q3 |
Note: Columns (1-4) are in million Jordanian Dinars, and columns (6-10) are in million US Dollars. And it is noted that the data in this table are updated based on the latest data in this publication.
6 Monetary Developments Report – Third Quarter 2020 Appendix (2): Central Bank Survey (In million US Dollars)
| Q3-19 | Q4-19 | Q1-20 | Q2-20 | Q3-20 |
|---|---|---|---|---|
| Net Foreign Assets | 981.71 | 1060.85 | 1205.08 | 1096.50 |
| Advances to non-controlled | 981.71 | 1060.85 | 1205.08 | 1096.50 |
| Liabilities to non-controlled | 0.00 | - | - | - |
| Advances to other securities | 593.96 | 688.02 | 608.35 | 706.30 |
| Net advances to monetary authority | 54.47 | -1.20 | 1.20 | 3.61 |
| Advances to monetary authority | 3.00 | 3.65 | 3.00 | - |
| Liabilities to monetary authority | 57.47 | -1.80 | -1.81 | 0.05 |
| Advances to other sectors | 5.95 | 4.21 | 4.53 | 4.50 |
| Other controlled liabilities | 0.11 | 0.05 | 0.06 | 0.02 |
| Advances to public sector | 5.85 | 4.16 | 4.48 | 4.50 |
| Legal Liquidity (1) | 1386.15 | 1610.99 | 1667.65 | 1652.20 |
| Liabilities to other securities | 1368.51 | 1593.40 | 1651.63 | 1639.40 |
| Liabilities to other sectors | 17.64 | 17.59 | 16.02 | 12.77 |
| Other liabilities to other securities | 3.03 | 3.03 | 3.04 | 3.03 |
| Deposits and financial instruments (Excl. Securities included in Legal Liquidity) | 0.35 | 0.45 | - | - |
| Deposits included in definition of broad money M2 | 0.02 | - | - | - |
| Deposits excluded from definition of broad money M2 | 0.33 | 0.43 | 43.0 | - |
| Loans | 0.00 | 0.11 | 0.11 | 0.00 |
| Securities and other rights | 153.32 | 153.18 | 161.44 | 157.20 |
| Net Other Liabilities | 15.70 | -13.47 | -13.52 | 1.88 |
(1) Includes the sum of banking sector deposits with the Palestinian Monetary Authority.
7 Monetary Developments Report – Third Quarter 2020 Table (3): Licensed Banks Survey in Palestine (Other Deposit-Taking Corporations) (In million US Dollars)
| Q3-19 | Q4-19 | Q1-20 | Q2-20 | Q3-20 |
|---|---|---|---|---|
| Net Foreign Assets | 4139.0 | 4365.6 | 3930.8 | 4095.9 |
| Advances to non-controlled | 4928.7 | 5201.5 | 4778.5 | 4889.4 |
| Liabilities to non-controlled | -789.8 | -835.9 | -847.7 | -793.5 |
| Advances to monetary authority | 1408.2 | 1648.3 | 1663.3 | 1651.7 |
| Reserve Money & Controlled Liabilities | 1408.2 | 1648.3 | 1663.3 | 1651.7 |
| Net advances to monetary authority | 1085.3 | 1301.8 | 1250.8 | 1382.1 |
| Advances to monetary authority | 1521.6 | 1631.9 | 1627.2 | 1777.7 |
| Liabilities to monetary authority | -436.3 | -330.1 | -376.4 | -395.5 |
| Advances to other sectors | 7777.4 | 7764.9 | 7948.9 | 8206.7 |
| Other controlled liabilities | 55.9 | 57.2 | 58.8 | 59.1 |
| Local monetary authority & net advances to banks | 17.6 | 18.1 | 16.2 | 17.1 |
| Non-controlled public sector liabilities | 8.6 | 8.8 | 8.7 | 8.2 |
| Advances to public sector | 7695.3 | 7680.7 | 7865.3 | 8122.3 |
| Public sector | 701.7 | 702.5 | 595.2 | 676.4 |
| Deposits transferable by check M2 | 5281.7 | 5444.5 | 5324.2 | 5602.9 |
| Other deposits excluded from M2 | 6833.0 | 7090.7 | 7100.5 | 7179.4 |
| Securities and other rights | 1818.4 | 1855.2 | 1867.9 | 1868.5 |
| Net Other Liabilities | -117.9 | 13.7 | -94.1 | 16.9 |
8 Monetary Developments Report – Third Quarter 2020 Table (4): Central Bank and Licensed Banks Survey in Palestine (Deposit-Taking Corporations) (In million US Dollars)
| Q3-19 | Q4-19 | Q1-20 | Q2-20 | Q3-20 |
|---|---|---|---|---|
| Net Foreign Assets | 5120.7 | 5426.43 | 5135.85 | 5188.90 |
| Advances to non-controlled | 5910.4 | 6262.33 | 5983.55 | 5986.07 |
| Liabilities to non-controlled | -789.8 | -835.90 | -847.69 | -797.17 |
| Net Local Assets | 8814.2 | 9072.08 | 9205.42 | 9597.46 |
| Net advances to monetary authority | 1030.8 | 1303.00 | 1251.97 | 1385.75 |
| Advances to monetary authority | 1524.6 | 1634.92 | 1630.17 | 1781.33 |
| Liabilities to monetary authority | -493.7 | -331.91 | -378.20 | -395.58 |
| Advances to other sectors | 7783.3 | 7769.08 | 7953.46 | 8211.71 |
| Other controlled liabilities | 56.0 | 57.27 | 58.81 | 59.10 |
| Local monetary authority & net advances to banks | 17.6 | 18.15 | 16.20 | 17.12 |
| Public sector | 7695.3 | 7680.7 | 7865.3 | 8122.3 |
| Legal Liquidity | 1386.15 | 1610.99 | 1667.65 | 1652.20 |
| Liabilities to other securities | 1368.51 | 1593.40 | 1651.63 | 1639.40 |
| Liabilities to other sectors | 17.64 | 17.59 | 16.02 | 12.77 |
| Other liabilities to other securities | 3.03 | 3.03 | 3.04 | 3.03 |
| Deposits and financial instruments (Excl. Securities included in Legal Liquidity) | 0.35 | 0.45 | - | - |
| Deposits included in definition of broad money M2 | 0.02 | - | - | - |
| Deposits excluded from definition of broad money M2 | 0.33 | 0.43 | 43.0 | - |
| Loans | 0.00 | 0.11 | 0.11 | 0.00 |
| Securities and other rights | 153.32 | 153.18 | 161.44 | 157.20 |
| Net Other Liabilities | 15.70 | -13.47 | -13.52 | 1.88 |