IS Pakistan’s growth party over? Not yet. But both the State Bank and government are now cutting down on the items on their menu relating to the unprecedented monetary and fiscal stimulus provided over the last 18 months “to mitigate the adverse impacts” of the Covid lockdowns in order to rapidly grow the economy. The goal is to prevent the economy from ‘overheating’ by restricting the expected growth rate to 5pc or below this fiscal year, easing pressure on the balance-of-payments position, and protecting the exchange rate and foreign exchange reserves which cover only three and a half months’ imports. The first hint of this shift came this week when the central bank slightly hiked its key rate by 25bps to 7.25pc with a view to slowing down the robust growth in domestic demand and imports which have widened the current account deficit and weakened the home currency. Apart from that, the bank has also signalled macro-prudential restrictions on auto and personal financing for cooling domestic demand. More importantly, the bank emphasises that the future pace of tapering off the monetary stimulus largely hinges on fiscal consolidation by the government since expansionary impulses could lead to bolstering demand for imports and push up inflation.

The government has responded by tinkering with its fiscal stimulus through the implementation of such measures as regulatory duty and 100pc cash margin requirements to restrict non-essential imports in a bid to cool an overheating economy. At best, the measures taken by the bank and government are inadequate to deal with the emerging upside risks that recovery poses to macroeconomic stability and, at worst it sounds like the ‘beginning of the reversal of the growth story’.

Finance Minister Shaukat Tarin’s concern that “the economy may overheat and there could be exchange rate-related problems if the GDP growth rate exceeds 5pc” shows that policymakers have woken up to the reality. They had been warned against the potentially negative impacts of their procyclical strategy on the balance of payments and advised caution. Until recently, neither the State Bank nor Mr Tarin was prepared to see the danger of an overheated economy. They have seen it at last as in their blind pursuit of growth, the current account deficit rose to $2.3bn during the July-August period with the rupee dropping to above 169 to a dollar from 152.28 in May. The upcoming review of the IMF programme, which has been in limbo since April, may have played a role since Islamabad knows it can’t afford to lose the lender’s support. The return of external vulnerabilities underpins the challenges of growing the economy without jeopardising external stability. These challenges cannot be overcome without tackling the structural issues, implementing governance reforms, boosting exports and reducing reliance on foreign debt. Till that happens, we’re stuck in low-growth mode and exposed to the perils of expansionary policies.

Published in Dawn, September 24th, 2021