THE State Bank’s mid-year report on the economy brings some good news. But it also raises areas of serious concern, raising doubts about the optimism with which the government has been talking about supposed improvements. The overall picture that emerges from the report is that several indicators that have improved — and that politicians have touted — are in fact at risk, and other indicators are worsening. Take inflation, for example. It finally dipped below 10 per cent in December, supported by better-than-expected agricultural output, but is expected to be back in the double digits by the end of the year. Or GDP growth: the SBP’s estimate of between three and four per cent for 2011-12 beats last year’s, but misses the target of above four per cent. The fiscal deficit has come down, but will be larger than planned for the year by one to two per cent of GDP.

A couple of developments over the last half-year have contributed to this scenario. For one, Pakistan’s external account position has worsened sharply. The prices of imports, especially oil, have pushed the trade balance into the red. Expected foreign inflows from such sources as American Coalition Support Funds, PTCL privatisation and 3G licence sales have not been realised. Send more money abroad than is coming home, and this sets off the expected chain reaction: a weaker rupee and increased domestic government borrowing (which more than doubled versus last year). Both have kept prices higher than they would otherwise be and will only make inflation worse in the months to come.

Some of these developments are beyond the government’s control. But what isn’t is the creation of a productive economy able to withstand these external shocks. Behind the broader statistics a picture emerges of an economy whose problems are deeper. The government did use up a large chunk of credit, but despite a falling interest rate, loans to the private sector in the first half of this year grew at a rate less than half of what it was a year ago. More worryingly, loans for investment were paid back by a larger amount than was borrowed last year. Pakistanis aren’t investing, and the SBP points to unsurprising factors: energy shortages, law and order, excess capacity. Some of the same reasons are behind the decline in textile exports. Political instability, corruption and law and order are leading to falling foreign investment. An economy that no one is investing in will grow slowly, yield lower taxes, continue to run a deficit and remain vulnerable to external developments. It is a vicious cycle, and short-term solutions will not be enough to break it.