THE latest quarterly report from the State Bank of Pakistan may sound like a dry affair, but read it a little closely and you’ll notice some startling revelations.

For the past three years now we have grown accustomed to a steady drumbeat of positive news and statements about the economy — the reserves are rising, the circular debt has been contained for almost two years now, growth is ticking upward (even if very slowly), the fiscal deficit is coming down (targeted to hit 3.8pc of GDP this year, the lowest in over a decade).

For a couple of years now we have been told that the country’s macroeconomic fundamentals are stabilising and a new round of investment coming in from China is laying the groundwork for a new growth spurt that will last far into the future.

This story has not been without its skeptics. We have heard similar stories in the past too, only to watch the whole thing unravel very quickly.

The skeptics have pointed out that the rise in reserves owes mostly to declining oil prices and increasing foreign borrowing, and as such is not sustainable.

The continuous declines in exports, drying up of FDI are serious weaknesses, they maintain, and while remittances have shored up the external account, this could change given the fiscal difficulties of the GCC countries.

In short, they have argued that the government’s narrative of an improving economy is built on shaky ground.

Examine: CPEC: The devil is not in the details

The latest SBP report, although optimistic in its overall tone, points towards some changes in the first quarter of the current fiscal year that could lend lasting credence to the voice of the skeptics.

Even though the SBP has taken pains to avoid letting its assessment become fodder for the skeptics to beat the government with, the underlying facts are too stark to now paper over.

We seem to be substituting CSF inflows with commercial borrowings from China as a stopgap measure to plug our current account deficit.

Here are some noteworthy developments the report brings up on the external sector.

Pakistan saw net inflow of $1.1 billion in “net loan and FDI inflows from China in Q1-FY17” says the report.

Out of this, $700 million (the lion’s share of the total) was a commercial loan from the China Development Bank whose only purpose, apparently, was to help pay for the nearly $2bn of machinery that Pakistan imported from China in the same quarter.

In case you missed it, let me put it in plain English here: we’re borrowing money on commercial terms from a Chinese bank to pay for machinery imported from China under CPEC-related projects.

Elaborating on this, the report says “[w]hereas Q1-FY16 had seen a dramatic pick-up in net FDI from China, it was long-term loan disbursements that dominated in Q1-FY17.”

So last year in the same quarter, Pakistan saw net FDI inflow from China of $192m, but this year that figure dropped to $91m.

And loans from China in the first quarter last year were $138m, and this year they jumped to $979m, of which $700m was the commercial loan mentioned above.

These inflows helped cover up a hole that opened up in the country’s external account due to the drying up of Coalition Support Funds (CSF).

In the same quarter last year, Pakistan ran a current account deficit that was less than half of what it ran this year. Last year the CSF inflows played a big role in helping cover the gap.

This year the report says the commercial borrowing from China “helped to cover the increase in current account gap and lower foreign investment in the quarter”.

This is important for a couple of reasons.

First, we seem to be substituting CSF inflows with commercial borrowings from China as a stopgap measure to plug a running deficit in our current account.

CSF was always billed as a “reimbursement”, and booked in our accounts as an export of a service (an awkward classification for what it implies).

But the Chinese loans are on commercial terms and, unlike CSF, have to be repaid with interest.

Another reason is that our three main non debt creating sources of foreign exchange inflows — exports, remittances and FDI — all registered declines in this quarter.

For exports, this was the 10th consecutive quarter of declines that are now becoming alarming.

For remittances, it was the first quarter of decline since 2012, and the report warns that an uptick is unlikely in the foreseeable future.

So our current account is weakening almost irreversibly while imports from China are skyrocketing, and the gap is being plugged by commercial borrowing from Chinese banks.

“[T]he structural weaknesses in the external account — reflected by the continuous drop in exports, lower FDI, and the drop in remittances — present a challenge,” says the report.

How sustainable is this?

What are the terms on these loans, and what sort of outflows will be created when repayment begins?

Nobody knows, not even the State Bank it seems.

But noting the shifting gears in the economy, the report does point out that “in the short run, it is imperative that CPEC projects (both power and infrastructure-related) continue at their projected pace, mainly to ensure steady arrival of associated FX inflows from China.”

And then goes on to add that “[t]his financing will also be crucial to offset the rise in the import bill stemming from higher CPEC-related machinery imports.”

Is this a new relationship of dependency being built here?

Are we now getting locked into a cycle of borrowing and imports under the garb of CPEC even as the more important pillars of the external sector — exports, remittances and FDI — shrivel up?

If so, the first quarter of fiscal year 2017 will be the moment when the gears shifted.

Where these trends take us is difficult to foresee, but increasingly the government’s narrative of economic improvement is beginning to sound like a high-stakes bet instead of sound policy.

The writer is a member of staff.

khurram.husain@gmail.com

Twitter: @khurramhusain

Published in Dawn, January 5th, 2017