IT has taken them a long time, but finally the State Bank has come around to the view that the deteriorating situation on the external sector presents risks to macroeconomic stability. The latest monetary policy statement says “the current account deficit is at the risk of widening further owing to declining exports and rising imports”. This is a departure from its usually sunny pronouncements throughout last year as the stresses on the external sector mounted. In May, for example, it could talk about the “stability in the balance of payments” which owed itself to “[s]teady workers remittances and lower oil prices”. Never mind that exports and FDI were showing deteriorating numbers. As late as July 30, the State Bank could still say that “[t]rends in the external sector are likely to continue in FY17”, even though evidence of worsening was mounting.

It appears the large spike in the current account deficit during the first two months of this fiscal year tipped the balance. The deficit rose by 93pc compared to the same period last year, making it difficult to paper over it by pointing towards remittances and inflows from creditors. There may well be a continued expansion in the economy, in terms of output, from CPEC projects and development spending by the government. But the quality of this expansion needs further comment because it is accompanied by a massive slowdown in agriculture and textiles. The announcement has a short focus on monetary aggregates, and briefly mentions “ongoing stability in the market interest rates”, which have come down all through the year. But again, whether this is healthy or not depends on who you ask. Banks are scrambling to find quality lenders, but the search is taking the form of a price war to bag public-sector borrowers instead of a ramped-up effort to introduce innovative products or venture into areas starved of credit like small and medium enterprises or agriculture. Given the mixed picture, it was prudent to keep interest rates constant.

Published in Dawn September 25th, 2016