IT might seem odd that the State Bank would say “inflation is likely to attain a higher plateau” in the future on the one hand, and yet cut the policy discount rate, even if by a meagre quarter of a percentage point. Nevertheless, the cut is too meagre to count as a meaningful step, and even if inflation is on the rise, this is still a healthy sign given the lows to which it had fallen in 2015. An increase in inflation can be considered healthy when the economy is struggling to recover from years of moribund growth, because it can be a sign of a revival in demand. But the uptick could also come from new revenue measures that a severely cash-strapped government could resort to in the forthcoming budget, or the upward movement of oil prices.

The least convincing part about the monetary policy statement, though, is where it dwells on the state of the economy. Celebrating a revival of growth, led by construction and consumption, ought to be beneath the dignity of an institution entrusted to look out for the medium term, as well as the underlying fundamentals. The ongoing collapse in the farm sector should not be papered over the way the State Bank did, by simply arguing that growth in industry can “salvage some of the lost momentum” from agriculture. Important reforms are needed to make agriculture more productive and less vulnerable to exogenous shocks, and the government should not be allowed to use industrial growth as an excuse for failures in this sector. Likewise in industry, “buoyant growth in construction and improved demand for consumer durables” is hardly something to cheer about, especially in the context of falling exports. But going on to say that these developments are “expected to provide the needed sustainability in growth trajectory and the basis for further improvement in FY17” simply stretches the argument to breaking point. The reserves do paint a positive picture, and the arrival of CPEC projects will surely boost the economy, as the statement points out. But one can only hope that too many eggs are not being put in that basket, given that the reserves growth owes to “favourable developments” and not any reforms, and the benefits of CPEC may or may not be as large or shared as widely as is being anticipated. The State Bank owes us a better description of the economy than this.

Published in Dawn, May 23rd, 2016