BACK in January of this year, the State Bank had cautioned that foreign inflows were dwindling even as foreign exchange reserves increased, and pointed to the problems that this scenario presented. Between June and December of 2014, net State Bank reserves had increased by $1.4 billion, driven by an issuance of an international Sukkuk, IMF disbursements and lower oil prices that had fallen by more than 60pc in that period.

But when reviewing this increase in net reserves, the bank went to some lengths to point out that the increase was coming from debt-creating inflows while non-debt inflows were drying up. These were its words in the monetary policy statement of January.

“From the perspective of medium-term sustainability of external sector, however, as frequently highlighted in earlier statements, the reliance on debt creating flows is not a sustainable solution. Apart from SBP’s efforts, a sustained build-up in SBP’s reserves can be achieved through two broad channels. First, there is a need for gradual reduction in trade deficit through increase in exports. Second, in addition to, conducive and investor friendly environment, revival of non-debt creating foreign private inflows is essential.”

The State Bank had been concerned about eroding debt service capacity of the country for some time.

Note the words “as frequently highlighted in earlier statements”.

In fact, the State Bank had been concerned about eroding debt service capacity of the country for some time, and had pointed towards the need to revive inflows through exports repeatedly. In earlier statements issued in the first half of 2014, it had noted the strong inflows coming in through bilateral channels as well as the 3G auction and privatisation proceeds, going so far as to say “[s]ince late 2001, Pakistan has not experienced such a sequence of positive developments in the external sector”.

But even then, they were careful to point out that this was all driven by debt-creating inflows, or one-off events, a phrase that echoed so widely in the media that the State Bank actually became shy of using it again.

Following the strong statement in January, however, the State Bank dropped all talk about the quality of the inflows that were leading to the build-up of reserves. The March statement had no caveats, preferring only to say that “the external sector outlook remains stable”.

But in the May statement, a meek little caveat managed to sneak in nonetheless. After noting that reserves have increased by $3.4bn between June 2014 and May 2015, the following words were added: “[i]ncrease in foreign private inflows can further strengthen this outlook and sustain stability in the foreign exchange market”.

Next came the July statement, giving a lengthier treatment to the issue. After going over the customary applause for the rising reserves, the statement added “[n]onetheless, as highlighted in previous statements that the financing of even a small external current account deficit can still be challenging due to lack of private financial inflows, particularly the non-debt creating flows.”

And again in September, after noting some favourable developments in the balance of payments, the State Bank pointed out that “increases in exports and foreign direct investments are imperative for sustainability of external sector”. Once again, that same pesky caveat, which took the shine off the reserves but bringing up the subject of debt creating inflows and their servicing burden, found its way into the pronouncement.

Most recently, the eighth review of the ongoing IMF programme, the report for which was issued in October, also pointed towards improving reserves but added that “the balance of payments position remains vulnerable and reserves are still significantly below adequacy norms”.

The report stopped short of saying that debt sustainability is a problem, but it had become almost customary to add the caveat about the vulnerability of the balance of payments position given the accumulation of debt.

This pesky question mark about the sustainability of the balance of payments has been buzzing around the rising graph of the reserves number for almost two years now, despite some attempts to swat it away. It disappears in some places, only to resurface again.

More recently still, the State Bank issued a press release pointing out that negative press commentary about the “quality of the reserves” was hampering their efforts to maintain exchange rate stability. The same release went to some lengths to show that debt sustainability is not as big a problem as the press commentary is making it out to be. It pointed out that in terms of GDP, total external debt had actually declined since 2009.

That may be true. But it is also the wrong metric by which to evaluate changes in external debt. For a more accurate picture, one should look at debt service obligations as a percentage of export earnings. According to data given in the IMF’s eighth review, this percentage had increased from 12 in 2010 to 23.7 by October 2015. This is not a small rise.

The reason I bring all this up is because in the latest monetary policy statement, the pendulum has swung in the opposite direction once again. Much like the statement issued in March, the review of developments on the external sector is entirely laudatory, despite noting a 10.6pc decline in exports on a year on year basis. Has that pesky question mark been swatted away temporarily? Or has the situation regarding the inflows changed materially between September and now?

Two reports are currently under preparation, and we will be parsing them very carefully to see how they go about the delicate task of presenting the context within which the matter of rising reserves ought to be placed. These are the Annual Report of the State Bank, to be issued by end December, and the ninth review of the IMF, also to be issued following board approval by end December.

You’re on notice folks. We’re all looking forward to seeing how you spin this! Don’t let us down!

The writer is a member of staff.

khurram.husain@gmail.com

Twitter: @khurramhusain

Published in Dawn, November 26th, 2015