DATA released on Thursday showed that the dreaded current account deficit, responsible for draining Pakistan’s foreign exchange reserves, has finally begun to shrink.

The government wasted no time in proclaiming the good news. More specifically, the data showed that between December and January, the deficit shrank by 47pc, which sounds like a large contraction; the finance minister claimed success on social media, saying that this was due to “decisive actions taken by the government”.

The optimism is understandable, since the deficit rose to historic highs before the PTI took over, and has played no small part in undermining this country’s macroeconomic stability. The government has had to move fast in order to arrest the decline in foreign exchange reserves that the current account deficit necessarily brought about, and much of its energy has been absorbed into the topping up of reserves through bilateral support and putting in place a set of policy actions to stem the growth of the deficit. So the first large contraction in the deficit will naturally evoke powerful sentiments from policymakers who have been involved in this work.

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But there are grounds for restraint. A closer look at the data reveals that nothing much has changed in the trade deficit picture, when the overall seven-month period is looked at.

This might be good news considering there is no deterioration, but not good enough to be celebrating. Much of the improvement in the current account deficit has come about because of a $1bn decrease in the import of services, and the fact that a spike in remittances in the month of December has sustained itself in January as well.

The contraction is likely to sustain itself in the months ahead since it would appear that the bulk of the contribution to import growth was coming from CPEC-related machinery imports, which are now drawing to a close, and oil prices have remained at very low levels.

But the real reason to celebrate will come once exports start showing a spike much larger than what has been the case as per the January data, where they grew by 15pc over December. Given the scale of the devaluations and the subsidies for exporters, there should be a much faster increase under this head in the coming months. Until then, it would be better to adopt the wait-and-see approach.

Published in Dawn, February 23rd, 2019