WITH exports dropping and the current account deficit spiking, the State Bank chose an awkward place to lay its emphasis in the latest monetary policy announcement. It devoted a few sentences to the worsening situation in the external sector, preferring to focus on the growth rate and the “expansion in economic activity”. It is true that the overall growth rate of the economy has been trending upwards since last year, and the outlook says this could extend into the next year too. In some sectors of the economy, sentiments are indeed ‘upbeat’, as the bank describes it. But the bigger cautionary tale lies in exports and the larger picture coming out of the external sector. The bank seeks some comfort in the assertion that “official inflows are expected to provide support to foreign exchange reserves”, but it should be noted that this is, to put it gently, a second best option. It is true that “a sustained increase in other private inflows — foreign direct investments and export earnings in particular — is required to fully finance the surge in imports”, as the State Bank puts it.

The statement also mentions an uptick in inflation in the days to come, attributing this mostly to an impending pass-through of oil prices, and a surging demand in the economy. Additionally, one wonders how the spending spree that is scheduled for next year in light of the elections is going to impact the monetary aggregates, thereby fuelling inflation further. But there is room for growth in inflation that has sat at almost unhealthy lows for a number of years now. The statement is at its most unconvincing when it says an improvement in global demand and the large share of machinery in the composition of imports “bodes well for future economic activities”. The customary mention of CPEC as a driver of growth is also less than fully convincing. The link between growth and the current account deficit is historically proven in this country. The realities today bring back memories of the Musharraf years, when the current account deficit and inflation eventually swamped the growth process. Today’s growth process is a lot less robust, and certainly less broad based than it was at that time. There are sound reasons to cautiously approach the government’s claim that it has revived growth and turned the corner from the low-growth, low-inflation equilibrium that the economy had settled into.

Published in Dawn, May 21st, 2017