THE latest monetary policy statement released by the State Bank shows the economy in the midst of a very mixed trend, with demand and investment both rising, but the current account deficit ballooning. The State Bank says that the nascent growth in the economy has pushed imports higher, while growth in remittances and “lack of any sustained improvement in exports” has caused the deficit to rise to $5.5bn. In the past, inflows under the financial account helped paper over current account deficits, but this time even though “net financial flows remained higher, these were not sufficient to finance the current account deficit”. We are told that with recent policies designed to boost exports and curb non-essential imports, “the current account deficit may be contained in the coming months”, but it has been some time since these measures were announced and their impact is not yet making itself felt. In the absence of any other policy interventions, the growing current account deficit could undermine the nascent growth achieved since 2013, and deserves stronger attention, particularly from the State Bank.

It would be easier to buy the State Bank’s assessment that the difficulties on the current account are only temporary, and simply the natural price to pay for rising growth and investment, if we had not heard this story before. It is worth remembering that the State Bank was saying much the same thing from 2004 onwards, when the current account deficit began to balloon, and the promised boost in exports that we were told will come once the imported machinery begins commercial operations did not arrive in quantities sufficient to balance the gaping deficit. This time the vulnerabilities are larger because the growth impetus given to the economy through the large financial inflows over the past three years is meagre by comparison to what we saw in the middle 2000s, and large-scale outflows are set to begin once the Chinese projects start commercial operations. The declining reserves need to be taken more seriously by the State Bank. In the closing months of the fiscal year, if the current account deficit continues to show deterioration, whether or not the ensuing gap is bridged with debt creating financial inflows, we will know that this is the fiscal year when the tide began to turn. External difficulties have engulfed growth spurts in the past, and we need to know why this time round things will be different.

Published in Dawn, March 27th, 2017