THIS might sound like a very elementary question, but it needs to be asked anyway. How do you describe an economy that is growing, but the growth is causing its foreign exchange reserves to deplete, potentially to a level that creates a balance-of-payments crisis? We are not in any such crisis at the moment, nor is one imminent. But if you take present-day trends and extrapolate them into the future, then it is not difficult to see that if things keep going the way they are,theleveloftheforeignexchange reserves will fall to a point where Pakistan has to go looking for emergency loans, usually from the IMF.

The latest monetary policy statement from the State Bank forces this question to the front, though it is not their intention to do so. The statement notes all the growth in the real sector, which it says will touch 5.8 per cent by the close of the Escal year, below the target of 6pc, but far higher than it has been for a decade. Inflation is also below target, and since this is usually the problem associated with growing economies, the fact that it is inching up but remains at manageable levels should be tal(en as a sign of economic health under ordinary circumstances.

Clearly though, these are not ordinary circumstancesbecause the bankhikedinterestratesupin anticipation of overheating. After noting healthy broad-based growth in large-scale manufacturing, coming in at 7.2pc between July and November of 2017, compared to 3.2pc in the same period of the preceding year, the statement adds that the agriculture sector has also put in a good performance forthesecondyearinarow.

In the macroeconomic area too, signs of health are visible. Revenue collection is up, expenditures are restrained, government borrowing for budgetary support is down, exports are ticking up faster and so are remittances.

With everything lool(ing good, from real-sector growth to government finances to external sector inflows, what exactly is the problem? The statement pinpoints one area: the trade deficit.

However, favourable impact of these positives was overshadowed by the continuation of strong growth in imports of goods and services. The current accountdeficit widened to $7.4 billion during the first half of the year, which was 1.6 times the deficit during the same period last year it says, and notes that this has caused State Bank reserves to drop by $2.6bn from end June till mid-January, coming in at $13.5bn at the end. The bank hopes that the depreciation of the rupee, along with incentives for exporters and regulatory duties on imports will, along with a few other things, contribute to a gradual reduction in the country`s current account deficit.

This is a bit of a contrast to what was happening in 2013, the year when Pakistan was forced to go tothe IMF for emergency assistance. Back then, the current account was not the problem. The real problem lay in a virtually zero net external financing for a ballooning budget deficit, which came in at 8.8pc at the close of fiscal year 2013, right after the elections and the epic retirement of the circular debt that the government undertook immediately upon coming to power.

The lack of financial inflows was a problem despite large receipts of $850 million under the Coalition Support Fund. At the heart of the problem was a very heavy repayment obligation from the previous IMF programme signed in 2008, which was heavily frontloaded and came with a rapid repayment schedule.

The problems may have lain elsewhere, but their effects were the same: a rapid deterioration in the foreign exchange reserves, which did not abate and eventually forced the country to the IMF by September of 2013. That fiscal year began with reserves at $10.8bn, ended with reserves at $6bn, and by September the figure had dropped to$5.2bn, of which $544m was the first tranche from the IMF programme. Of the $3.2bn drop in the reserves, $3bn was accounted for by a repayment to the IMF in that year for the borrowing from 2008.

All those repayments are now finished, and the new facility signed in 2013 carries softer repayment terms, stretched out over a much longer time horizon. Net inflows remain strong this year, by contrast to 2013, and the real sector is booming today where it was anaemic back then. Energy shortages have been overcome (at least at the generation stage), and the country is receiving very high levels of foreign investment mainly under the CPEC framework.

Yet the reserves continue their stubborn downward glide path that began from October 2016 when they had hit a record high peak. To some extent, it would seem that this decline in the reserves is due to the growth in the real sector itself, since machinery imports account for a certain portion of imports. But equally, the growing role of consumption in our economy is fuelling an influx of consumer items that cannot be considered an investment in future growth.

So how should we see this mixed performance? Is it possible we are committed to a growth process that we cannot afford? Will CPEC-related investments come to our rescue just in the nick of time, as exports ramp up once these investments begin commercial operations? The State Bank leaves us with a single line to help understand where the whole enterprise is taking us. While increase in international oil prices pose a major risk to this assessment it says after listing all the positives that could help mitigate the trade deficit in the days to come, managing the overall balance of payments in the near term depends on the realisation of ofHcial Enancial flows. That`s the crux of the statement. All the 1(ung fu in the real sector will not save us if the declines in the foreign exchange reserves continue, even if the pace of the declines reduces. • The writer is a member of staff.

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