Monetary Policy | Editorial

THE State Bank has all but confirmed that the economy has now hit the choppiest of waters ever since the growth process began a few years ago. The latest monetary policy statement, which announced a one percentage point increase in the key discount rate, the largest increase since monetary tightening began, is only the tip of the iceberg. The statement is littered with language that should be cause for serious concern at the policy level. Of course, there is little that the interim government can do about it since the measures required go far beyond its mandate. To give an example, the State Bank says aggregate demand “has proved to be higher than previously thought”, and the provisional estimate for the fiscal deficit for fiscal year 2018 is now 6.8pc as opposed to 5.5pc estimated in May. The current account deficit has come in at $16bn from July to May, compared to $11.1bn in the same period last year, despite multiple rounds of exchange rate depreciation and a rebound in exports. Whatever improvements we may have seen in exports and remittances, “the sheer size of imports continues to pressurise FX reserves”. Perhaps with this in mind, the bank has warned that “the near-term management of the country’s external accounts is of critical importance”. The urgency is now palpable.
The net reduction of foreign exchange reserves of $6.7bn seen till July 6 is now the headline story of the economy, and the unsustainably high levels of demand in the economy will be the big challenge to contain. Without rapid and large-scale stabilisation efforts, through further depreciation in the exchange rate and sharp cuts in spending, along with rate hikes on the most elastic taxes (usually petroleum and power), the situation will not be brought under control. The question asked through the years when the government touted its growth story now asserts itself aggressively: can the economy afford this growth? For next year, the State Bank has estimated the growth rate to come in at 5.5pc, considerably below the target of 6.2pc set by the government. From here onward, the waters are going to get choppier still since the driving forces — growing fiscal and external deficits — are unlikely to go away on their own. The party is over, from the looks of it. The days of growth are over, and stabilisation measures are around the corner, in a repeat of a cycle that is decades old.
Published in Dawn, July 15th, 2018

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