THE State Bank has hewed to a cautious stance in keeping the key discount rate unchanged in its latest monetary policy announcement despite furnishing a very upbeat assessment of the state of the economy. Inflation is down to `a 47 year low of 2.9pc` while growth has `touched an 8 year high of 4.7pc`, according to the central bank. Foreign exchange reserves are sufficient to cover four months of imports, while the fiscal situation is stable as `revenue collection exceeded expectations`. The bank says growth could well experience a `spurt` in the forthcoming fiscal year due to elevated project spending, whether through the PSDP or CPEC, improved energy supply and a better law-and-order situation.

On the surface, the bank says, things are well; but lurking beneath it all are risks of a serious nature. A continuing slowdown in China and the Gulf, coupled with uncertainties relating to the EU and Brexit complications, could weigh down future growth. The biggest risk would be an unexpected rise in oil prices. Given the narrow base of growth revival, and the continuing dependence of the economy on official inflows from abroad, these are hazards to be taken seriously. The bank also veers towards over-optimism in painting its constant liquidity injections into the banking system as a positive force, especially by claiming that they have `helped in a better transmission of monetary policy`. In fact, these injections are evidence of a dysfunction more than anything else. If they have played a role in lifting private-sector credit offtake, it shows that the bank has met with little success in urging the financial sector to move out of its addiction to government lending. The revival in growth that the bank is pointing out is real, no doubt, but it is important to bear in mind that it is built on generous levels of government spending and State Bank-sponsored liquidity provision. These are far from the foundations of sustainable growth, and the central bank ought to be clearer in mentioning that.