Going by the IMF’s latest post-programme monitoring report, the economy continues to deteriorate, even as private-sector activity is gathering momentum.

The government expects the GDP growth rate to rise to 6pc by the end of the fiscal year, while the Fund projects the same figure at 5.6pc. The difference is appreciable, but in both cases the trend is still upward, showing that the pace of activity in the economy is rising.

But the external sector, the traditional Achilles heel of Pakistan’s economy, is rapidly deteriorating. Foreign exchange reserves are falling fast, mainly on account of a growing trade deficit that the government is struggling to contain through ad hoc measures like regulatory duties and a slight depreciation in the exchange rate.

The Fund report estimates that net international reserves, the figure we get after deducting key short-term liabilities as well as money owed to the IMF from the gross foreign exchange reserves, is now negative $0.7bn. Back in 2016, when the last Fund programme ended, the same figure stood at $7.5bn.

This is a very large decline, even though the gross reserves are still sufficient to cover just over two months of imports, above critical levels but below the benchmark for sustainability, which is four months. The decline appears to be driven by a fall in the gross foreign exchange reserves since September 2016 as well as a doubling of the State Bank’s own short-term liabilities in the form of forwards and swaps.

An obvious question asserts itself regarding these two developments: rising GDP growth rate and falling foreign exchange reserves. The question is, which of these trumps the other? Will the GDP growth and the attendant investments that lie behind it become some sort of auto-correcting mechanism, in due course driving up exports, boosting competitiveness and thereby arresting and reversing the growing current account deficit?

Or will the continuously declining foreign exchange reserves eventually force an abrupt correction in the form of a large devaluation, hike in interest rates and collapse of domestic demand, as happened in 2008? Projected out into medium-term future, common sense says that eventually economic growth bows to economic fundamentals, and not the other way round.

The report shows that the Fund staff and the government did not see eye to eye when looking into the future in the medium term. The government’s projections of the state of inflows and outflows of foreign exchange were clearly more bullish that that of the Fund. According to the Fund’s projections, gross foreign exchange reserves will not hit the critical level of one month’s import cover for another three years.

There is still time for corrective action, but ad hoc measures, which include short-term borrowing and regulatory duties, do not seem to be doing the trick.

Published in Dawn, March 17th, 2018