THE State Bank of Pakistan’s annual report starts off by telling us that the situation may have looked grim at the start of the last fiscal year, but with time many things improved.

Inflation went down, reserves went up, the fiscal deficit was contained and growth saw a modest revival. But read on and the shine diminishes steadily as the caveats appear.

Yes, inflation went down, but surely much of this decline owed to larger than expected declines in oil prices, and a steep appreciation of the rupee. Reserves went up, but largely on the back of one-off inflows, driven mostly by borrowing.

Also read:SBP report says most targets missed

The fiscal deficit was indeed contained at 5.5pc, but much of this was made possible by accounting tricks, without whose aid the deficit would have been 7.5pc. Growth saw a modest revival, especially in manufacturing, but much of this centred on areas that the SBP does not see as priorities, like beverages and fertiliser.

The report is skilfully written to avoid assigning any blame, and rightly highlights the structural weaknesses that have plagued Pakistan’s economy for many decades.

Manpower, for instance, is the country’s largest export — larger than textiles, if we compare remittances with textile exports. This is a problem, because it means the economy’s capacity to earn foreign exchange is steadily being eroded.

Some perspective on this problem is provided a few pages later, when the report looks more closely at the recovery in the reserves posted earlier in the year. That recovery allowed the rupee to appreciate, and unlocked other inflows from the donor agencies and international investors. But since that recovery was financed by borrowed money, “certain debt sustainability indicators witnessed erosion” at the same time.

Not satisfied with this admittedly mild rebuke, the report goes on to add “this should be viewed as a warning that Pakistan must increase its hard currency earnings in the future, and not take on expensive debt to finance its external deficit”. This deficiency, which is growing wider each year, lies at the heart of the economy’s dysfunction.

The description of the rulers’ response to the challenges does not live up to the positive spin that the government likes to put on its own track record.

Shortages of gas “have regressed to publicly lobbying policymakers” — polite language for ad hoc management. Failure in the power sector is visible in the resurgent circular debt, “which will be paid off this fiscal year” — a debt, we were told 18 months ago, that would not be allowed to recur again.

Any improvement in the fiscal equation is either driven by one-off measures, or by large increases in withholding taxes, pointing towards the difficulty in getting people to file their returns. The report gives a balanced and substantive look at what ails our economy, and Q block would be well advised to read its contents carefully.

Published in Dawn, December 12th, 2014