THE latest annual report of the State Bank of Pakistan echoes much of the same view held by the IMF and other independent economists: the economy has stabilised, but a lot of the work needed to mend it remains to be done. At the heart of the stabilisation are two central facts. The fiscal deficit has shrunk to 4.6pc of GDP, down from the 6pc plus average it had maintained for the previous half decade, and down by 0.7pc from last year; and foreign exchange reserves have risen to cover seven months of imports, the most comfortable position they have been in for more than half a decade. Taken together, all that these two data points tell us is that some breathing room has opened up, but that if key structural reforms are not undertaken, the situation could reverse quickly. This is the central message of the annual report and it deserves to be heeded.

The report shows how much of the improvement has been gained through short-term measures. The improvement in the fiscal situation, for example, owes much to a rise in consumption of petroleum products as well as adjustments in the structure of its taxation. Moreover, “the share of withholding tax has increased further, which downplays the role of revenue authorities on the one hand, and increases the compliance costs of businesses on the other”. Broadening of the tax base has seen no progress, and measures to impose a cost on nonfilers of tax returns “had unintended negative fallout”, such as a growth in currency in circulation by 2pc of GDP and a fall in deposits. Broadening the base remains a priority, “without further burdening the already compliant taxpayers”, says the report. Expenditures were restrained “primarily from low interest rates, which significantly reduced [the government’s] debt servicing burden” on domestic debt. These measures are fine, but they are not enough to build our future fiscal strength on.

The story is similar for reserves and external debt. Interest payments fell to 34.5pc of tax revenue, down from 43.2pc last year, accounting for much of the drop in the fiscal deficit, on the back of lower interest rates. But the quantum of debt increased rapidly, both domestic and external, despite a lower deficit. At least 20pc of the new debt acquired last year was parked in deposits with the banks, which points towards poor debt management. The real worry is about the external debt, which is high-cost and a growing amount of which is short-term. Given that exports are shrinking, FDI is not encouraging, and remittances are coming under pressure, we can expect trouble on the external front if something does not turn around soon. The report makes clear that much work remains to be done to put the economy on a sound footing, and declaring victory would be premature.

Published in Dawn, November 20th, 2016