THE macroeconomic projections listed by the State Bank of Pakistan in its annual report on the nation’s economy demonstrate that the bank is sticking to its earlier forecast with regard to growth, inflation and the fiscal and current account deficits for the present financial year. This is in spite of a sharp upsurge in domestic prices, the strong pressure on balance of payments owing to a spike in imports in the last four months, and risks to the current account that it had outlined in its monetary policy statement recently. “The economic recovery during the last fiscal is projected to gain further momentum this year. This is evident ... from high frequency demand indicators during the initial months of the current fiscal year.” The bank has projected GDP to grow in the range of 4pc-5pc, inflation to lurk in the range of 7pc-9pc and the fiscal and current account deficits to hover between 6.3pc and 7.3pc, and 2pc and 3pc, of GDP respectively.

The market has a different view of the central bank’s macroeconomic projections though. Headline consumer price inflation, for instance, is expected to average around 11pc-12pc in the remaining eight months of the present fiscal, compared to the average of 8.7pc for the first four months and the SBP forecast of up to 9pc. The estimates are based on inflationary measures such as increase in the petroleum development levy and electricity tariff, abolition of tax exemptions etc. that the government has agreed to for the resumption of the $6bn IMF funding. Thus, annual average inflation is more likely to cross into double digits, contrary to SBP projections. Likewise, the current account in the period between July and October has already shot up to over $5bn or 4.7pc of GDP. The central bank expects the monthly current account imbalance to decrease to just above $500m or about a third of $1.66bn for October. The market is expecting a monthly run rate of $1bn or more for the current account deficit in spite of multiple actions announced by the SBP over the last two months to contain domestic demand and curb the soaring import bill.

At the moment, it is hard to predict who — the central bank or the market — will prove correct at the end of the day. But then, it is also a fact that the SBP has got many of its predictions wrong. For example, the July monetary policy statement noted that “there were good reasons to expect that, unlike several previous growth upturns in Pakistan, the current economic recovery would be accompanied by external stability”. And here we are firefighting to stop further deterioration of the current account in four months. Similarly, a deputy SBP governor told businessmen in March 2020 that Covid-19 would not hurt Pakistan’s economy, days before the bank announced the most generous monetary stimulus for businesses. Clearly, the bank needs to be more realistic.

Published in Dawn, November 26th, 2021